Robust Delegation with Uncertain Monetary Policy Preferences

Marco Sorge

EERI Research Paper Series from Economics and Econometrics Research Institute (EERI), Brussels

Abstract: 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.

Keywords: Delegation; Conservative central bank; Preference uncertainty; Minmax policy. (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2012-04-05
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Journal Article: Robust delegation with uncertain monetary policy preferences (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eei:rpaper:eeri_rp_2012_05

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