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Imperfect Credibility and Robust Monetary Policy

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  • Richard Dennis

Abstract

This paper studies the behavior of a central bank that seeks to conduct policy optimally while having imperfect credibility and harboring doubts about its model. Taking the Smets-Wouters model as the central bank’s approximating model, the paper’s main findings are as follows. First, a central bank’s credibility can have large consequences for how policy responds to shocks. Second, central banks that have low credibility can benefit from a desire for robustness because this desire motivates the central bank to follow through on policy announcements that would otherwise not be time-consistent. Third, even relatively small departures from perfect credibility can produce important declines in policy performance. Finally, as a technical contribution, the paper develops a numerical procedure to solve the decision-problem facing an imperfectly credible policymaker that seeks robustness.

Suggested Citation

  • Richard Dennis, 2013. "Imperfect Credibility and Robust Monetary Policy," CAMA Working Papers 2013-68, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2013-68
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    Cited by:

    1. Ippei Fujiwara & Scott Davis, 2017. "Dealing with Time-inconsistency: Inflation Targeting vs. Exchange Rate Targeting," 2017 Meeting Papers 795, Society for Economic Dynamics.
    2. repec:eee:reveco:v:50:y:2017:i:c:p:196-244 is not listed on IDEAS
    3. Davis, J. Scott & Fujiwara, Ippei, 2015. "Pegging the exchange rate to gain monetary policy credibility," Globalization and Monetary Policy Institute Working Paper 224, Federal Reserve Bank of Dallas.
    4. Eurilton Araújo, 2016. "Monetary Policy Credibility and the Comovement between Stock Returns and Inflation," Working Papers Series 449, Central Bank of Brazil, Research Department.

    More about this item

    Keywords

    Imperfect Credibility; Robust Policymaking; Time-consistency;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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