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Credibility and the Value of Information Transmission in a Model of Monetary Policy and Inflation

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  • Basar, T
  • Salmon, Mark

Abstract

In this paper we solve for the optimal (Stackelberg) policy in a model of credibility and monetary policy developed by Cukierman and Meltzer. Unlike the (Nash) solution provided by Cukierman and Meltzer, the dynamic optimization problem facing the monetary authority in this case is not of a linear quadratic form and certainty equivalence does not apply. The learning behavior of the private sector (regarding the policymaker's preferences) becomes intimately linked with the choice of the optimal policy and cannot be separated as in the certainty equivalent case. Once the dual effect of the optimal Stackelberg policy is recognized, the monetary authority has an additional channel of influence to consider beyond that taken into account by sub-optimal, certainty equivalent, Nash policy rules.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 338.

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Date of creation: Oct 1989
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Handle: RePEc:cpr:ceprdp:338

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Related research

Keywords: Asymmetric Information; Monetary Policy; Time Consistency;

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Cited by:
  1. Martin Ellison & Lucio Sarno & Jouko Vilmunen, 2006. "Caution or Activism? Monetary Policy Strategies in an Open Economy," Computing in Economics and Finance 2006 214, Society for Computational Economics.
  2. Volker Wieland, 1999. "Monetary policy, parameter uncertainty and optimal learning," Finance and Economics Discussion Series 1999-48, Board of Governors of the Federal Reserve System (U.S.).
  3. Felipe Morandé L. & Mauricio Tejada G., 2008. "Sources of Uncertainty in Monetary Policy Conduct in Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 11(3), pages 45-80, December.
  4. Soderstrom, Ulf, 2002. " Monetary Policy with Uncertain Parameters," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(1), pages 125-45.
  5. Felipe Morandé & Mauricio Tejada, 2008. "Sources of Uncertainty for Conducting Monetary Policy in Chile," Working Papers Central Bank of Chile 492, Central Bank of Chile.
  6. Martin Ellison & Lucio Sarno & Jouko Vilmunen, 2004. "Monetary policy and learning in an open economy," Macroeconomics 0404022, EconWPA.
  7. Geraats, Petra Maria, 2001. "Precommitment, Transparency and Monetary Policy," Discussion Paper Series 1: Economic Studies 2001,12, Deutsche Bundesbank, Research Centre.

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