Constrained Discretion and Central Bank Transparency

Francesco Bianchi and Leonardo Melosi

No WP-2014-16, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: We develop and estimate a general equilibrium model in which monetary policy can deviate from active inflation stabilization and agents face uncertainty about the nature of these deviations. When observing a deviation, agents conduct Bayesian learning to infer its likely duration. Under constrained discretion, only short deviations occur: Agents are confident about a prompt return to the active regime, macroeconomic uncertainty is low, welfare is high. However, if a deviation persists, agents? beliefs start drifting, uncertainty accelerates, and welfare declines. If the duration of the deviations is announced, uncertainty follows a reverse path. For the U.S. transparency lowers uncertainty and increases welfare.

Keywords: Bayesian learning; reputation; uncertainty; expectations; Markov-switching models; impulse responses (search for similar items in EconPapers)
JEL-codes: C11 D83 E52 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2014-07-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Constrained Discretion and Central Bank Transparency (2018)
Working Paper: Constrained Discretion and Central Bank Transparency (2016)
Working Paper: Constrained Discretion and Central Bank Transparency (2014)
Working Paper: Constrained Discretion and Central Bank Transparency (2014)
Working Paper: Constrained Discretion and Central Bank Transparency (2014)
Working Paper: Constrained Discretion and Central Bank Transparency (2013)
Working Paper: Constrained Discretion and Central Bank Transparency (2012)
Working Paper: Constrained Discretion and Central Bank Transparency (2012)
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