Inflation contract, central bank transparency and model uncertainty

Meixing Dai () and Eleftherios Spyromitros

Economic Modelling, 2012, vol. 29, issue 6, 2371-2381

Abstract: Using a New-Keynesian model subject to misspecifications, we examine how the robust monetary policy could be modified by a linear inflation contract when a central bank is opaque about its preference for model robustness. It is shown that a central bank must limit this preference and opacity about it to ensure the dynamic stability of the economy. An optimal inflation contract with a zero penalty rate provides no incentive for a central bank to be opaque. The latter must rebalance the benefit of avoiding very bad outcomes in worst case scenarios and the economic costs due to higher macroeconomic volatility.

Keywords: Inflation contract; Model uncertainty; Model robustness; Robust monetary policy; Central bank transparency (opacity) (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:29:y:2012:i:6:p:2371-2381

DOI: 10.1016/j.econmod.2012.06.021

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