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Imperfect Credibility and Robust Monetary Policy

  • Richard Dennis

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 banks approximating model, the papers main fi ndings are as follows. First, a central banks credibility can have large consequences for how policy responds to shocks. Second, central banks that have low credibility can benefi t 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.

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Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2013_14.

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Date of creation: Aug 2013
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Handle: RePEc:gla:glaewp:2013_14
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