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ROBUST MONETARY POLICY UNDER UNCERTAINTY ABOUT CENTRAL BANK PREFERENCES
Author(s) -
Qin Li,
Sidiropoulos Moïse,
Spyromitros Eleftherios
Publication year - 2010
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/j.1467-8586.2009.00324.x
Subject(s) - robustness (evolution) , monetary policy , economics , central bank , transparency (behavior) , new keynesian economics , output gap , robust control , inflation targeting , monetary economics , computer science , control system , engineering , biochemistry , chemistry , computer security , electrical engineering , gene
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.