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Robust Delegation with Uncertain Monetary Policy Preferences

  • Marco M. Sorge

Recent research has renewed interest in the exploration of the optimal design of monetary policy institutions in the presence of uncertainty. In this paper, we revisit the rationale for delegation to a weight-conservative central banker when the social planner’s knowledge about the true preferences of delegates is ex ante ambiguous and he exhibits a preference for robustness. In this context, a robust (worst-case oriented) delegation strategy is intended to minimize the maximum welfare loss over the uncertainty set, when no prior probability distribution for the preference bias (conservatism-gap) is available. We find that both over and underconservatism may emerge with respect to the certainty case, for robust delegation is shown to be model-dependent. Most importantly, under reasonable model’s parameterizations, Rogoff’s principle is reversed: it is optimal for society to appoint a weight-liberal central banker.

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Paper provided by Economics and Econometrics Research Institute (EERI), Brussels in its series EERI Research Paper Series with number EERI_RP_2012_05.

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Date of creation: 05 Apr 2012
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Handle: RePEc:eei:rpaper:eeri_rp_2012_05
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  1. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, June.
  2. Giuseppe Diana & Moise Sidiropoulos, 2006. "Robust Control and Monetary Policy Delegation," Working Papers of BETA 2006-26, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  3. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  4. Guido Tabellini, 1985. "Centralized Wage Setting and Monetary Policy in a Reputational Equilibrium," UCLA Economics Working Papers 369, UCLA Department of Economics.
  5. Sibert, Anne, 2002. "Monetary policy with uncertain central bank preferences," European Economic Review, Elsevier, vol. 46(6), pages 1093-1109, June.
  6. Blinder, Alan S. & Ehrmann, Michael & de Haan, Jakob & Fratzscher, Marcel & Jansen, David-Jan, 2008. "Central Bank communication and monetary policy: a survey of theory and evidence," Working Paper Series 0898, European Central Bank.
  7. Tillmann Peter, 2009. "Does Model Uncertainty Justify Conservatism? Robustness and the Delegation of Monetary Policy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-28, June.
  8. Beetsma, Roel & Jensen, Henrik, 1997. "Inflation Targets and Contracts with Uncertain Central Banker Preferences," CEPR Discussion Papers 1562, C.E.P.R. Discussion Papers.
  9. Carsten Hefeker & Blandine Zimmer, 2011. "Central Bank Independence and Conservatism under Uncertainty: Substitutes or Complements?," CESifo Working Paper Series 3344, CESifo Group Munich.
  10. Kai Leitemo & Ulf Soderstrom, 2004. "Robust Monetary Policy in the New-Keynesian Framework," Working Papers 273, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  11. Dennis, Richard, 2010. "How robustness can lower the cost of discretion," Journal of Monetary Economics, Elsevier, vol. 57(6), pages 653-667, September.
  12. Li Qin & Moïse Sidiropoulos & Eleftherios Spyromitros, 2010. "Robust Monetary Policy Under Uncertainty About Central Bank Preferences," Bulletin of Economic Research, Wiley Blackwell, vol. 62(2), pages 197-208, 04.
  13. Tillmann, Peter, 2008. "The conservative central banker revisited: Too conservative is more costly than too liberal," European Journal of Political Economy, Elsevier, vol. 24(4), pages 737-741, December.
  14. Guzzo, Vincenzo & Velasco, Andres, 1999. "The case for a populist Central Banker," European Economic Review, Elsevier, vol. 43(7), pages 1317-1344, June.
  15. Francesco Lippi, 2000. "Revisiting the Case for a Populist Central Banker," Temi di discussione (Economic working papers) 386, Bank of Italy, Economic Research and International Relations Area.
  16. 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.
  17. Alexei Onatski & Noah Williams, 2003. "Modeling Model Uncertainty," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1087-1122, 09.
  18. Tillmann, Peter, 2009. "The stabilization bias and robust monetary policy delegation," Journal of Macroeconomics, Elsevier, vol. 31(4), pages 730-734, December.
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