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Competence Implies Credibility

Author

Listed:
  • Giuseppe Moscarini

Abstract

The (reputation for) competence of a central bank at doing its job makes monetary policy under discretion credible and transparent. Based on its reading of the state of the economy, the central bank announces its policy intentions to the public in a cheap-talk game. The precision of its private signal measures its competence. The fineness of the equilibrium message space measures its credibility and transparency. This is increasing in the competence/inflation bias ratio: the public expects a competent central bank to use its discretion more to pursue its "objective" targets than to surprise expectations and stimulate output. (JEL E52, E58)

Suggested Citation

  • Giuseppe Moscarini, 2007. "Competence Implies Credibility," American Economic Review, American Economic Association, vol. 97(1), pages 37-63, March.
  • Handle: RePEc:aea:aecrev:v:97:y:2007:i:1:p:37-63
    Note: DOI: 10.1257/aer.97.1.37
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    File URL: http://www.aeaweb.org/aer/data/mar07/20040192_app.pdf
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    References listed on IDEAS

    as
    1. Susan Athey & Andrew Atkeson & Patrick J. Kehoe, 2005. "The Optimal Degree of Discretion in Monetary Policy," Econometrica, Econometric Society, vol. 73(5), pages 1431-1475, September.
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    6. Christian Hellwig, 2002. "Public Announcements, Adjustment Delays, and the Business Cycle (November 2002)," UCLA Economics Online Papers 208, UCLA Department of Economics.
    7. Stein, Jeremy C, 1989. "Cheap Talk and the Fed: A Theory of Imprecise Policy Announcements," American Economic Review, American Economic Association, vol. 79(1), pages 32-42, March.
    8. Roland Benabou & Guy Laroque, 1992. "Using Privileged Information to Manipulate Markets: Insiders, Gurus, and Credibility," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 921-958.
    9. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
    10. Prendergast, Canice & Stole, Lars, 1996. "Impetuous Youngsters and Jaded Old-Timers: Acquiring a Reputation for Learning," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1105-1134, December.
    11. Krishna, Vijay & Morgan, John, 2004. "The art of conversation: eliciting information from experts through multi-stage communication," Journal of Economic Theory, Elsevier, vol. 117(2), pages 147-179, August.
    12. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Li, Ming & Madarász, Kristóf, 2008. "When mandatory disclosure hurts: Expert advice and conflicting interests," Journal of Economic Theory, Elsevier, vol. 139(1), pages 47-74, March.
    2. Vithessonthi, Chaiporn & Techarongrojwong, Yaowaluk, 2012. "The impact of monetary policy decisions on stock returns: Evidence from Thailand," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 487-507.
    3. Deimen, Inga & Szalay, Dezsö, 2014. "Smooth, strategic communication," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100333, Verein für Socialpolitik / German Economic Association.
    4. Vithessonthi, Chaiporn & Techarongrojwong, Yaowaluk, 2013. "Do monetary policy announcements affect stock prices in emerging market countries? The case of Thailand," Journal of Multinational Financial Management, Elsevier, vol. 23(5), pages 446-469.
    5. Demertzis Maria & Viegi Nicola, 2009. "Inflation Targeting: A Framework for Communication," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-32, December.
    6. Deimen, Inga & Szalay, Dezso, 2015. "Information, authority, and smooth communication in organizations," CEPR Discussion Papers 10969, C.E.P.R. Discussion Papers.
    7. repec:gii:giihei:ciesrp:cies_rp_27 is not listed on IDEAS
    8. Manuel Amador & Pierre-Olivier Weill, 2010. "Learning from Prices: Public Communication and Welfare," Journal of Political Economy, University of Chicago Press, vol. 118(5), pages 866-907.
    9. Di Maggio, Marco, 2009. "Accountability and Cheap Talk," MPRA Paper 18652, University Library of Munich, Germany.
    10. Rhee, Hyuk Jae & Turdaliev, Nurlan, 2013. "Central bank transparency: Does it matter?," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 183-197.
    11. Turdaliev, Nurlan, 2010. "Communication in repeated monetary policy games," International Review of Economics & Finance, Elsevier, vol. 19(2), pages 228-243, April.
    12. Chiara Ravetti & Yana Popp Jin & Mu Quan & Zhang Shiqiu & Timothy Swanson, 2014. "Air pollution in Urban Beijing: The role of Government-controlled information," CIES Research Paper series 27-2014, Centre for International Environmental Studies, The Graduate Institute.
    13. Bagus, Philipp & Howden, David, 2014. "Fiscal Considerations of Central Bank Recapitalization," MPRA Paper 79606, University Library of Munich, Germany.
    14. Canh Thien Dang & Trudy Owens, 2017. "What motivates Ugandan NGOs to diversify: Risk reduction or private gain?," Discussion Papers 2017-11, University of Nottingham, CREDIT.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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