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Does Model Uncertainty Lead to Less Central Bank Transparency?

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  • Li Qin
  • Elefterios Spyromitros
  • Moïse Sidiropoulos

Abstract

This paper discusses the problem of monetary policy transparency in a simple static robust control framework. In this framework, we identify two sources of monetary policy uncertainty. First, we identify the uncertainty about the central bank’s inflation stabilization preferences, which affects the private sector’s inflation expectations and therefore the realized inflation and output. On the other hand, uncertainty means that central bank is unsure about its model, in the sense that there is a group of approximate models that it also considers as possibly true and its objective is to choose a rule that will work under a range of different model specifications. We find that robustness reveals the emergence of a precautionary behaviour of the central bank in the case of unstructured model uncertainty, reducing thus central bank’s willingness to choice a high degree of monetary policy transparency.

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Bibliographic Info

Paper provided by Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg in its series Working Papers of BETA with number 2006-22.

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Date of creation: 2006
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Handle: RePEc:ulp:sbbeta:2006-22

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Keywords: central bank transparency; min-max policies; model uncertainty; robust control.;

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References

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  1. Geraats, P.M., 2001. "Why Adopt Transparency? The Publication of Central Bank Forecasts," Papers 41, Quebec a Montreal - Recherche en gestion.
  2. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(4), pages 589-610, August.
  3. Giordani, Paolo & Söderlind, Paul, 2002. "Solution of Macromodels with Hansen-Sargent Robust Policies: Some Extensions," Working Paper Series in Economics and Finance, Stockholm School of Economics 499, Stockholm School of Economics, revised 15 May 2003.
  4. Leitemo, Kai & Söderström, Ulf, 2005. "Robust Monetary Policy in a Small Open Economy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5071, C.E.P.R. Discussion Papers.
  5. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(4), pages 1169-89, November.
  6. Alexei Onatski & Noah Williams, 2003. "Modeling Model Uncertainty," NBER Working Papers 9566, National Bureau of Economic Research, Inc.
  7. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 112(483), pages 532-565, November.
  8. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
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Citations

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Cited by:
  1. Sofia Pessoa e Costa & Stéphane Robin, 2007. "The Impact Of Training Programmes On Wages In France: An Evaluation Of The “Qualifying Contract” Using Propensity Scores," Working Papers of BETA, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg 2007-18, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  2. Estelle Dhont-Peltrault & Etienne Pfister, 2007. "R&D cooperation versus R&D subcontracting: empirical evidence from French survey data," Working Papers of BETA, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg 2007-17, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  3. Meixing DAI & Moïse SIDIROPOULOS & Eleftherios SPYROMITROS, 2007. "La transparence de la politique monétaire et la dynamique des marchés financiers," Working Papers of BETA, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg 2007-19, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  4. Li Qin & Eleftherios Spyromitros & Moïse Sidiropoulos, 2007. "Monetary Policy with Uncertain Central Bank Preferences for Robustness," Working Papers of BETA, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg 2007-23, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  5. Meixing DAI, 2007. "A two-pillar strategy to keep inflation expectations at bay: A basic theoretical framework," Working Papers of BETA, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg 2007-20, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  6. Gisèle Umbhauer, 2007. "De l’amiante au chrysotile, un glissement stratégique dans la désinformation," Working Papers of BETA, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg 2007-15, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  7. Azomahou, Théophile & Mishra, Tapas, 2008. "Age dynamics and economic growth: Revisiting the nexus in a nonparametric setting," Economics Letters, Elsevier, Elsevier, vol. 99(1), pages 67-71, April.

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