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Working Paper
On Monetary Policy, Model Uncertainty, and Credibility
This paper studies the design of optimal time-consistent monetary policy in an economy where the planner and a representative household are faced with model uncertainty: While they are able to construct and agree on a reference model (probability distribution) governing the evolution of the exogenous state of the economy, a representative household has fragile beliefs and is averse to model uncertainty. In such environments, management of households' expectations becomes an active channel of optimal policymaking per se. A central banker who respects the fact that private sector models are ...
Working Paper
Optimal monetary policy under model uncertainty without commitment
This paper studies the design of optimal time-consistent monetary policy in an economy where the planner trusts its own model, while a representative household uses a set of alternative probability distributions governing the evolution of the exogenous state of the economy. In such environments, unlike in the original studies of time-consistent monetary policy, managing households' expectations becomes an active channel of optimal policymaking per se, a feature that the paternalistic government seeks to exploit. We adapt recursive methods in the spirit of Abreu, Pearce, and Stacchetti (1990) ...