Imperfect Credibility and Robust Monetary Policy

Richard Dennis

No 2013-78, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE)

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 bene.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.

Keywords: Imperfect Credibility; Robust Policymaking; Time-consistency (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Related works:
Journal Article: Imperfect credibility and robust monetary policy (2014)
Working Paper: Imperfect Credibility and Robust Monetary Policy (2013)
Working Paper: Imperfect Credibility and Robust Monetary Policy (2013)
Working Paper: Imperfect Credibility and Robust Monetary Policy (2012)
Working Paper: Imperfect Credibility and Robust Monetary Policy (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:edn:sirdps:514

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