IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Monetary Policy in the Presence Of Imperfect Observability Of The Objectives Of Central Bankers

  • Francesco Salsano

    (Department of Economics, Mathematics & Statistics, Birkbeck)

Registered author(s):

    The paper presents a theoretical model for analysis of the imperfect observability of central bank preferences by the private sector on the decisions taken by the monetary authority, and therefore on the infation rate. It examines in particular the connection which, in the presence of a time inconsistency problem, arises between the observability of the monetary institution?s goals and its equilibrium strategies. The model yields innovative results from the technical and economic points of view. From the technical point of view, the study of equilibrium strategies in a simple signalling model allows derivation of the equilibrium outcomes of a monetary policy game already examined by D'Amato and Pistoresi (1996) and Sibert (2002), without the restrictions that those authors impose on the basis of the types of monetary institution. It is thus possible to identify the conditions on the model's parameters under which a pure separating equilibrium arises, and the conditions under which there instead exists a hybrid equilibrium in which some types of Central Bankers adopt separating strategies (Vickers 1986; D?Amato and Pistoresi 1996; Sibert 2002) while others adopt pooling strategies similar to those studied by Backus and Driffill (1985). From an economic point of view, the paper shows a number of relations that arise, in equilibrium, between the degree of observability and transparency of the Central Banker's goals and the infation rate set by the Central Banker.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.bbk.ac.uk/ems/research/wp/PDF/BWPEF0523.pdf
    File Function: First version, 2005
    Download Restriction: no

    Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0523.

    as
    in new window

    Length:
    Date of creation: Nov 2005
    Date of revision:
    Handle: RePEc:bbk:bbkefp:0523
    Contact details of provider: Postal: Malet Street, London WC1E 7HX, UK
    Phone: 44-20- 76316429
    Fax: 44-20- 76316416
    Web page: http://www.ems.bbk.ac.uk/

    Order Information: Email:


    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. David Kreps & Robert Wilson, 1998. "Sequential Equilibria," Levine's Working Paper Archive 237, David K. Levine.
    2. David Backus & John Driffill, 1984. "Inflation and Reputation," Working Papers 560, Queen's University, Department of Economics.
    3. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, June.
    4. Vickers, John, 1986. "Signalling in a Model of Monetary Policy with Incomplete Information," Oxford Economic Papers, Oxford University Press, vol. 38(3), pages 443-55, November.
    5. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August.
    6. Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, vol. 50(2), pages 443-59, March.
    7. Anton Muscatelli, 1998. "Inflation Contracts And Inflation Targets Under Uncertainty: Why We Might Need Conservative Bankers," Working Papers 9801, Business School - Economics, University of Glasgow.
    8. Driffill, John, 1987. "Macroeconomic Policy Games with Incomplete Information - A Survey," The Warwick Economics Research Paper Series (TWERPS) 288, University of Warwick, Department of Economics.
    9. Alberto Alesina & Vittorio Grilli, 1991. "The European Central Bank: Reshaping Monetary Politics in Europe," NBER Working Papers 3860, National Bureau of Economic Research, Inc.
    10. McCallum, Bennett T., 1997. "Crucial issues concerning central bank independence," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 99-112, June.
    11. Jensen, Henrik, 1997. "Credibility of Optimal Monetary Delegation," American Economic Review, American Economic Association, vol. 87(5), pages 911-20, December.
    12. Sibert, Anne, 1999. "Monetary Policy Committees: Individual and Collective Reputations," CEPR Discussion Papers 2328, C.E.P.R. Discussion Papers.
    13. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
    14. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
    15. Marcello D'Amato & Barbara Pistoresi, 1996. "La Riservatezza del Banchiere Centrale รจ un Bene o un Male?," Working Papers 253, Dipartimento Scienze Economiche, Universita' di Bologna.
    16. V.V. Chari & Patrick J. Kehoe & Edward C. Prescott, 1988. "Time consistency and policy," Staff Report 115, Federal Reserve Bank of Minneapolis.
    17. Persson, T. & Tabellini, G., 1997. "Political Economics and Macroeconomic Policy," Papers 630, Stockholm - International Economic Studies.
    18. Sibert, Anne, 2001. "Monetary Policy With Uncertain Central Bank Preferences," CEPR Discussion Papers 3113, C.E.P.R. Discussion Papers.
    19. Bagwell, Kyle, 1995. "Commitment and observability in games," Games and Economic Behavior, Elsevier, vol. 8(2), pages 271-280.
    20. Susan Athey & Andrew Atkeson & Patrick J. Kehoe, 2004. "The optimal degree of discretion in monetary policy," International Finance Discussion Papers 801, Board of Governors of the Federal Reserve System (U.S.).
    21. Albanesi, Stefania, 2003. "Optimal and Time-Consistent Monetary and Fiscal Policy with Heterogeneous Agents," CEPR Discussion Papers 3713, C.E.P.R. Discussion Papers.
    22. Barro, Robert J., 1986. "Reputation in a model of monetary policy with incomplete information," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 3-20, January.
    23. Adam S. Posen, 1995. "Declarations Are Not Enough: Financial Sector Sources of Central Bank Independence," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 253-274 National Bureau of Economic Research, Inc.
    24. Stefania Albanesi & V. V. Chari & Lawrence J. Christiano, 2003. "How severe is the time-inconsistency problem in monetary policy?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 17-33.
    25. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 53-84, December.
    26. Driffill, John, 1987. "Macroeconomic Policy Games with Incomplete Information: Some Extensions," CEPR Discussion Papers 159, C.E.P.R. Discussion Papers.
    27. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
    28. Alessandro Riboni, 2010. "Committees As Substitutes For Commitment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(1), pages 213-236, 02.
    29. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
    30. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
    31. Bennett T. McCallum, 1995. "Two Fallacies Concerning Central Bank Independence," NBER Working Papers 5075, National Bureau of Economic Research, Inc.
    32. Fershtman, Chaim & Kalai, Ehud, 1997. "Unobserved Delegation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(4), pages 763-74, November.
    33. Alessandro Riboni, 2004. "Time Consistency in Dynamic Bargaining: The Role of Committees as Substitutes for Commitment," 2004 Meeting Papers 684, Society for Economic Dynamics.
    34. Vincent, Daniel R, 1998. "Repeated Signalling Games and Dynamic Trading Relationships," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 275-93, May.
    35. Alesina, Alberto & Gatti, Roberta, 1995. "Independent Central Banks: Low Inflation at No Cost?," American Economic Review, American Economic Association, vol. 85(2), pages 196-200, May.
    36. Muscatelli, V Anton, 1999. "Inflation Contracts and Inflation Targets under Uncertainty: Why We Might Need Conservative Central Bankers," Economica, London School of Economics and Political Science, vol. 66(262), pages 241-54, May.
    37. Mailath, George J, 1987. "Incentive Compatibility in Signaling Games with a Continuum of Types," Econometrica, Econometric Society, vol. 55(6), pages 1349-65, November.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:bbk:bbkefp:0523. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.