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

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Author Info
Basar, T
Salmon, Mark

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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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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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  1. Ellison, Martin & Sarno, Lucio & Vilmunen, Jouko, 2004. "Monetary policy and learning in an open economy," Research Discussion Papers 3/2004, Bank of Finland. [Downloadable!]
    Other versions:
  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.). [Downloadable!]
    Other versions:
  3. Söderström, Ulf, 1999. "Monetary policy with uncertain parameters," Working Paper Series 83, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
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  4. Geraats, Petra, 2001. "Precommitment, Transparency and Monetary Policy," Discussion Paper Series 1: Economic Studies 2001,12, Deutsche Bundesbank, Research Centre. [Downloadable!]
  5. 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. [Downloadable!]
    Other versions:
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