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

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  • Basar, Tamer
  • Salmon, Mark

Abstract

In this paper we solve for the optimal (Stickler) policy in a model of credibility and monetary policy developed by Cuckierman and Meltzer (1986). Unlike the (Nash) solution provided by Cuckierman and Meltzer the dynamic optimisation problem facing the monetary authority in this case is not a linear quadratic form and certainly equivalence does not apply. The learning behaviour of the private sector (regarding the policy maker'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 recognised the monetary authority has an additional channel of influence to consider beyond that taken into policy rules. Unlike Nash behaviour the Stackelberg solution implies no inflationary bias but it lacks credibility. The learning behaviour of the private sector does not sufficiently inhibit the incentive of the monetary authority to cheat in this model despite the fact that this learning is explicitly recognised in the Stackelberg solution.

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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 289.

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Length: 38 pages
Date of creation: 1987
Date of revision:
Handle: RePEc:wrk:warwec:289

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Cited by:
  1. Soderstrom, Ulf, 2002. " Monetary Policy with Uncertain Parameters," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(1), pages 125-45.
  2. 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.
  3. Felipe Morandé Lavín & Mauricio Tejada, 2008. "Sources of Uncertainty for Conducting Monetary Policy in Chile," Working Papers wp285, University of Chile, Department of Economics.
  4. Geraats, Petra Maria, 2001. "Precommitment, Transparency and Monetary Policy," Discussion Paper Series 1: Economic Studies 2001,12, Deutsche Bundesbank, Research Centre.
  5. Wieland, Volker, 1999. "Monetary policy, parameter uncertainty and optimal learning," ZEI Working Papers B 09-1999, ZEI - Center for European Integration Studies, University of Bonn.
  6. Ellison, Martin & Sarno, Lucio & Vilmunen, Jouko, 2004. "Monetary policy and learning in an open economy," Research Discussion Papers 3/2004, Bank of Finland.
  7. 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.

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