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Incomplete Information in Monetary Policy Games: Rules Rather Than a Conservative Central Banker
Author(s) -
Lossani Marco,
Natale Piergiovanna,
Tirelli Patrizio
Publication year - 1998
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/1467-9485.00080
Subject(s) - reputation , delegation , ex ante , economics , independence (probability theory) , exploit , monetary policy , welfare , government (linguistics) , complete information , central bank , microeconomics , monetary economics , macroeconomics , market economy , law , political science , computer security , computer science , mathematics , management , linguistics , statistics , philosophy
Time inconsistency in monetary policy can be addressed appointing a conservative central banker. But incomplete information about the central banker's preferences impairs the performance of delegation schemes. Firstly, the ensuing ex‐ante variability of monetary response lowers welfare. Secondly, partial independence schemes may prove inadequate because reputation — not only legal arrangements — defines the actual degree of independence. The incumbent may exploit his reputation to impose too conservative policies whereas, if he lacks reputation, partial independence forces him to accommodate. As a result, simple rules may be preferred. …I do not believe that we should always get the best man for the post; often I fear that we should not even get a tolerable man. (W. Bagehot, The Government of the Bank of England, in ‘Lombard Street’)