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Constrained Discretion and Central Bank Transparency

Author

Listed:
  • Francesco Bianchi

    (Duke University, CEPR, and NBER)

  • Leonardo Melosi

    (Federal Reserve Bank of Chicago)

Abstract

We develop and estimate a general equilibrium model to assess the effects and welfare implications of central bank transparency. Monetary policy can deviate from active inflation stabilization, and agents conduct Bayesian learning about the nature of these deviations. Under constrained discretion, only short deviations occur, agents’ uncertainty about the macroeconomy remains contained, and welfare is high. However, if a deviation persists, uncertainty eventually accelerates and welfare declines. Announcing that inflation stabilization will be temporarily abandoned raises uncertainty. However, these announcements lower policy uncertainty and curb inflationary beliefs at the end of the policy. For the United States, enhancing transparency raises welfare.

Suggested Citation

  • Francesco Bianchi & Leonardo Melosi, 2018. "Constrained Discretion and Central Bank Transparency," The Review of Economics and Statistics, MIT Press, vol. 100(1), pages 187-202, March.
  • Handle: RePEc:tpr:restat:v:100:y:2018:i:1:p:187-202
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    More about this item

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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