Accountability and Transparency About Central Bank Preferences for Model Robustness

Dai, Meixing; Spyromitros, Eleftherios

doi:10.1111/j.1467-9485.2010.00514.x

Cited by 13 publications

(7 citation statements)

References 31 publications

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“…γ t+1 = γ t = γ. 12 It corresponds to the speed at which new data are integrated into current expectations.…”

Section: Learning Rules Of Private Agentsmentioning

confidence: 99%

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The limits to robust monetary policy in a small open economy with learning agents

André¹,

Dai²

2020

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We study the impact of adaptive learning for the design of a robust monetary policy using a small open-economy New Keynesian model. We find that slightly departing from rational expectations substantially changes the way the central bank deals with model misspecification. Learning induces an intertemporal trade-off for the central bank, i.e., stabilizing inflation (output gap) today or stabilizing it tomorrow. The central bank should optimally anchoring private agents expectations in the short term in exchange of easier future intratemporal trade-offs. Compared to the rational expectations equilibrium, the possibility to conduct robust monetary policy is limited in a small open economy under learning for any exchange rate pass-through level and any degree of trade openness. The misspecification that can be introduced into all equations of the model is lower in a small open economy, and approaches zero at high speed as the learning gain rises.

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“…γ t+1 = γ t = γ. 12 It corresponds to the speed at which new data are integrated into current expectations.…”

Section: Learning Rules Of Private Agentsmentioning

confidence: 99%

“…Eliminating x t and h π t in the Phillips curve (2) using the targeting rule (11) and equation (12), and substituting h e t and r t given respectively by equation (14) and the optimal interest rate rule (15) into the UIP condition (4) yield Cπ t = βE t π t+1 + φe t + ε π t , (A.1)…”

Section: A Appendixmentioning

confidence: 99%

The limits to robust monetary policy in a small open economy with learning agents

André¹,

Dai²

2020

Self Cite

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“…Giannoni and Woodford 2002;Onatski and Stock 2002;Giordani and Söderlind 2004;Leitemo and Söderström 2008;Gonzalez and Rodriguez 2013) and implies that the CB takes stronger action to avoid particularly costly outcomes. This can generate inflation persistence (Qin, Sidiropoulos, and Spyromitros 2013) and justify the appointment of a liberal central banker if the latter has a greater concern about misspecifications of the Phillips curve (Dai and Spyromitros 2010). In contrast, a conservative central banker would be preferable when concern for misspecifications of the true degree of shock persistence or these of the output gap was considered (Tillmann 2009;.…”

Section: Introductionmentioning

confidence: 99%

Learning, robust monetary policy and the merit of precaution

André

Dai

2018

The B.E. Journal of Macroeconomics

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We study in a New Keynesian framework the consequences of adaptive learning for the design of robust monetary policy. Compared to rational expectations, the fact that private sector follows adaptive learning gives the central bank an additional intertemporal trade-off between optimal behavior in the present and in later periods thanks to its ability to manipulate future inflation expectations. We show that adaptive learning imposes a more restrictive constraint on monetary policy robustness to ensure the dynamic stability of the equilibrium than under rational expectations but strengthens the argument in favor of a more aggressive monetary policy when the central bank fears for model misspecifications.

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“…For Walsh (), this type of transparency supports a stricter targeting regime. Dai and Spyromitros () establish that opacity about the model robustness provides an argument against the appointment of a conservative central banker. For Jensen (), operational transparency—such as disclosure of control errors—may be disadvantageous if the central bank enjoys low inflation credibility.…”

Section: Introductionmentioning

confidence: 99%

Central bank transparency under the cost channel

Dai

Zhang

2017

International Finance

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This paper studies the implications of information disclosure about the central bank's preferences regarding inflation and output‐gap stabilization in the presence of the cost channel of monetary transmission. Through this channel, higher interest rates translate into higher marginal costs of production and, finally, into higher inflation. Conventional wisdom has it that whether the central bank is transparent alters the effects of cost‐push or supply shocks, but does not change the fact that demand shocks are fully offset by optimal monetary policy. We show that this view is incorrect in the presence of a cost channel, since the latter not only affects how transparency interacts with cost‐push shocks, but also makes it interact with demand shocks. Moreover, the desirability of full transparency when shocks are persistent is significantly reduced by the presence of the cost channel.

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Accountability and Transparency About Central Bank Preferences for Model Robustness

Cited by 13 publications

References 31 publications

The limits to robust monetary policy in a small open economy with learning agents

The limits to robust monetary policy in a small open economy with learning agents

Learning, robust monetary policy and the merit of precaution

Central bank transparency under the cost channel

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