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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Managing beliefs about monetary policy under discretion
Elmar Mertens
Abstract

In models of monetary policy, discretionary policymaking often lacks the ability to manage public beliefs, which explains the theoretical appeal of policy rules and commitment strategies. But as shown in this paper, when a policymaker possesses private information, belief management becomes an integral part of optimal discretion policies and improves their performance. ; Solving for optimal policy in a simple New Keynesian model, this paper shows how discretionary losses are reduced when the policymaker has private information. Furthermore, disinflations are pursued more vigorously, when the hidden information problem is larger, even when inflation is partly backward-looking.


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Elmar Mertens, Managing beliefs about monetary policy under discretion, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2010-11, 2010.
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Keywords: Monetary policy
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