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Imperfect Credibility versus No Credibility of Optimal Monetary Policy

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  • Chatelain, Jean-Bernard
  • Ralf, Kirsten

Abstract

A minimal central bank credibility, with a non-zero probability of not reneging his commitment (“quasi-commitment”), is a necessary condition for anchoring inflation expectations and stabilizing inflation dynamics. By contrast, a complete lack of credibility, with the certainty that the policy-maker will renege his commitment (“optimal discretion”), leads to the local instability of inflation dynamics. In the textbook example of the New Keynesian Phillips curve, the response of the policy instrument to inflation gaps for optimal policy under quasi-commitment has an opposite sign than in optimal discretion, which explains this bifurcation.

Suggested Citation

  • Chatelain, Jean-Bernard & Ralf, Kirsten, 2021. "Imperfect Credibility versus No Credibility of Optimal Monetary Policy," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 0(1), pages 43-63.
    • Handle: RePEc:zbw:espost:323623
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    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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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