Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5098578 | Journal of Economic Dynamics and Control | 2014 | 34 Pages |
Abstract
This paper studies the behavior of a central bank that seeks to conduct policy optimally while having imperfect credibility and harboring doubts about its model. Taking the Smets-Wouters model as the central bank׳s approximating model, the paper׳s main findings are as follows. First, a central bank׳s credibility can have large consequences for how policy responds to shocks. Second, central banks that have low credibility can benefit from a desire for robustness because this desire motivates the central bank to follow through on policy announcements that would otherwise not be time-consistent. Third, even relatively small departures from perfect credibility can produce important declines in policy performance. Fourth, the risk premium shock represents an important potential source of model misspecification. Finally, as a technical contribution, the paper develops a numerical procedure to solve the decision-problem facing an imperfectly credible policymaker that seeks robustness.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Richard Dennis,