Federal Reserve Bank of Chicago
Working Paper Series
Constrained Discretion and Central Bank Transparency
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. For the U.S. transparency lowers uncertainty and increases welfare.
Cite this item
Francesco Bianchi & Leonardo Melosi, Constrained Discretion and Central Bank Transparency, Federal Reserve Bank of Chicago, Working Paper Series WP-2014-16, 01 Jul 2014.
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
Keywords: Bayesian learning; reputation; uncertainty; expectations; Markov-switching models; impulse response
This item with handle RePEc:fip:fedhwp:wp-2014-16
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