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The stabilization bias and robust monetary policy delegation


  • Tillmann, Peter


Discretionary monetary policy suffers from a stabilization bias, whose size is known to be dependent on the degree of shock persistence. This note analyzes the size of this bias and, consequently, the rationale for delegating monetary policy to an inflation-averse central banker, when the economy faces uncertainty about the true degree of shock persistence. We show that the stabilization bias increases if uncertainty becomes larger. Hence, the degree of optimal monetary conservatism increases with the degree of uncertainty.

Suggested Citation

  • Tillmann, Peter, 2009. "The stabilization bias and robust monetary policy delegation," Journal of Macroeconomics, Elsevier, vol. 31(4), pages 730-734, December.
  • Handle: RePEc:eee:jmacro:v:31:y:2009:i:4:p:730-734

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    References listed on IDEAS

    1. Carl Walsh, 2003. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 93(1), pages 265-278, March.
    2. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March.
    3. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    4. Dennis, Richard & Soderstrom, Ulf, 2006. "How Important Is Precommitment for Monetary Policy?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 847-872, June.
    5. Henrik Jensen, 2002. "Targeting Nominal Income Growth or Inflation?," American Economic Review, American Economic Association, vol. 92(4), pages 928-956, September.
    6. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, July.
    7. Marc P. Giannoni, 2007. "Robust optimal monetary policy in a forward-looking model with parameter and shock uncertainty," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(1), pages 179-213.
    8. Otmar Issing, 2002. "Monetary policy in a changing economic environment," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 183-205.
    9. A. Hakan Kara, 2002. "Robust Targeting Rules for Monetary Policy," Discussion Papers 0208, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    10. Giannoni, Marc P., 2002. "Does Model Uncertainty Justify Caution? Robust Optimal Monetary Policy In A Forward-Looking Model," Macroeconomic Dynamics, Cambridge University Press, vol. 6(01), pages 111-144, February.
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    Cited by:

    1. Richard Dennis, 2007. "Model uncertainty and monetary policy," Working Paper Series 2007-09, Federal Reserve Bank of San Francisco.
    2. Qin, Li & Sidiropoulos, Moïse & Spyromitros, Eleftherios, 2013. "Robust monetary policy under model uncertainty and inflation persistence," Economic Modelling, Elsevier, vol. 30(C), pages 721-728.
    3. Carsten Hefeker & Blandine Zimmer, 2015. "Optimal Conservatism and Collective Monetary Policymaking under Uncertainty," Open Economies Review, Springer, vol. 26(2), pages 259-278, April.
    4. Sorge, Marco M., 2013. "Robust delegation with uncertain monetary policy preferences," Economic Modelling, Elsevier, vol. 30(C), pages 73-78.
    5. Dennis, Richard, 2010. "How robustness can lower the cost of discretion," Journal of Monetary Economics, Elsevier, vol. 57(6), pages 653-667, September.
    6. André, Marine Charlotte & Dai, Meixing, 2017. "Is central bank conservatism desirable under learning?," Economic Modelling, Elsevier, vol. 60(C), pages 281-296.
    7. Tillmann, Peter, 2014. "Robust monetary policy, optimal delegation and misspecified potential output," Economics Letters, Elsevier, vol. 123(2), pages 244-247.


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