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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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