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Structural Uncertainty and Central Bank Conservatism: The Ignorant Should Keep Their Eyes Shut

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  • Rosal, Joao Mauricio
  • Spagat, Michael

Abstract

We study the problem of a central bank whose policy actions simultaneously affect the information flow about its expectations-augmented Phillips curve and its reputation for toughness in fighting inflation. In an environment with an unknown relationship between inflation surprises and output, big inflation surprises yield big short-term output gains and a strong information flow. Yet optimal policy is very conservative because inflation surprises yield information that increases the volatility of both future inflationary expectations and inflation itself. In fact, the more there is that can be learned about the Phillips curve the less does optimal policy aim towards learning.

Suggested Citation

  • Rosal, Joao Mauricio & Spagat, Michael, 2002. "Structural Uncertainty and Central Bank Conservatism: The Ignorant Should Keep Their Eyes Shut," CEPR Discussion Papers 3568, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3568
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    References listed on IDEAS

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    Cited by:

    1. Ellison, Martin, 2006. "The learning cost of interest rate reversals," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1895-1907, November.
    2. Miller, Marcus & Thampanishvong, Kannika & Zhang, Lei, 2003. "Learning to Forget? Contagion and Political Risk in Brazil," CEPR Discussion Papers 3785, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    central bank conservatism; experimentation; learning; monetary policy; reputation;

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • 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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