Caution and conservatism in the making of monetary policy
AbstractDoes society benefit from the delegation of monetary policy to cautious and conservative central bankers? We offer a critical view on the delegation literature and relax seemingly innocuous assumptions about uncertainty and preferences. First, caution improves credibility but does not obviate the need for central-bank conservatism. Second, previous models of delegation have focused on suboptimal forms of conservatism. We derive optimal concepts of conservatism that mitigate, or eliminate, any residual problem of credibility. Third, we rationalize why credible monetary policy may be conducive to stable inflation and output. JEL Classification: E50
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Date of creation: Jul 2000
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- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
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