Can Ignorance Make Central Banks Behave?
This paper presents a model in which "instrument uncertainty"-that is, an uncertain mapping from monetary policy to macroeconomic outcomes-may mitigate the inflationary bias problem that arises when efficient monetary policy rules are time- inconsistent. If the relation between monetary policy and macroeconomic outcomes is uncertain, the private sector has an incentive to scrutinize the past for clues about this relationship. This learning creates a link between past government behavior and present inflation expectations that the government can exploit to enhance its credibility. The model implies that the two conventional arguments for simple rules in monetary policy-one stressing the central bank's poor forecasting abilities and the other stressing the perils of discretion-may work at cross-purposes. Moreover, it provides an explanation of the cyclical behavior of inflation due to political cycles and of the correlation between the level and variance of inflation.
|Date of creation:||Jul 1995|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://fmwww.bc.edu/EC/
More information through EDIRC
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.:
- Matthew B. Canzoneri, 1983.
"Monetary policy games and the role of private information,"
International Finance Discussion Papers
249, Board of Governors of the Federal Reserve System (U.S.).
- Canzoneri, Matthew B, 1985. "Monetary Policy Games and the Role of Private Information," American Economic Review, American Economic Association, vol. 75(5), pages 1056-70, December.
- Rogoff, Kenneth & Sibert, Anne, 1988.
"Elections and Macroeconomic Policy Cycles,"
Review of Economic Studies,
Wiley Blackwell, vol. 55(1), pages 1-16, January.
- 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.
- Logue, Dennis E & Willett, Thomas D, 1976. "A Note on the Relation between the Rate and Variability of Inflation," Economica, London School of Economics and Political Science, vol. 43(17), pages 151-58, May.
- William Poole, 1970.
"Optimal choice of monetary policy instruments in a simple stochastic macro model,"
57, Board of Governors of the Federal Reserve System (U.S.).
- Poole, William, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, MIT Press, vol. 84(2), pages 197-216, May.
- William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
- Rogoff, Kenneth, 1987.
"Reputational constraints on monetary policy,"
Carnegie-Rochester Conference Series on Public Policy,
Elsevier, vol. 26(1), pages 141-181, January.
- 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.
- Matthew B. Canzoneri & Dale W. Henderson & Kenneth S. Rogoff, 1981.
"The information content of the interest rate and optimal monetary policy,"
International Finance Discussion Papers
192, Board of Governors of the Federal Reserve System (U.S.).
- Canzoneri, Matthew B & Henderson, Dale W & Rogoff, Kenneth S, 1983. "The Information Content of the Interest Rate and Optimal Monetary Policy," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 545-66, November.
- Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
- Holbrook, Robert S, 1972. "Optimal Economic Policy and the Problem of Instrument Instability," American Economic Review, American Economic Association, vol. 62(1), pages 57-65, March.
- Garfinkel, Michelle R & Oh, Seonghwan, 1993. "Strategic Discipline in Monetary Policy with Private Information: Optimal Targeting Horizons," American Economic Review, American Economic Association, vol. 83(1), pages 99-117, March.
When requesting a correction, please mention this item's handle: RePEc:boc:bocoec:291. 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: (Christopher F Baum)
If references are entirely missing, you can add them using this form.