ROBUST MONETARY POLICY UNDER UNCERTAINTY ABOUT CENTRAL BANK PREFERENCES

Li Qin, Moise Sidiropoulos and Eleftherios Spyromitros

Bulletin of Economic Research, 2010, vol. 62, issue 2, 197-208

Abstract: In this paper, we study the impact of central bank opacity on macroeconomic performances in a new Keynesian framework with model uncertainty using robust control techniques. We identify a new source of central bank opacity, which refers to the lack of information about the central bank's preference for robustness in the sense of Hansen and Sargent. We find closed‐form solutions for the robust control problem, analysing the impact of the lack of transparency about the central bank's preferences for robustness. We show that an increased transparency about the central bank's preference for robustness makes monetary policy respond less aggressively to cost‐push shocks, thus reducing the inflation and output gap variability. As a consequence, inflation and output gap are less volatile than under central bank opacity about its preference for robustness.

Date: 2010
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https://doi.org/10.1111/j.1467-8586.2009.00324.x

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