Constrained Discretion and Central Bank Transparency / Francesco Bianchi, Leonardo Melosi.

Format:

Book

Author/Creator:

Bianchi, Francesco.

Contributor:

National Bureau of Economic Research.

Melosi, Leonardo.

Series:

Working Paper Series (National Bureau of Economic Research) no. w20566.

NBER working paper series no. w20566

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2014.

Summary:

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. When estimated to match past U.S. experience, our model suggests that transparency lowers uncertainty and increases welfare.

Notes:

Print version record

October 2014.