Caution and Conservatism in the Making of Monetary Policy

Schellekens, Philip

doi:10.1353/mcb.2002.0035

Cited by 19 publications

(17 citation statements)

References 29 publications

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“…This implies: y Ã [ " y. We assume that policymakers cannot observe a multiplicative shock, i.e., l $ 1; r 2 l (for similar specifications, see, among others, Letterie 1997;Pearce and Sobue 1997;Lawler 2002;Schellekens 2002). 12 Note that the introduction of an additive shock does not affect the (average) outcome and the optimal policy of the model because of the linear-quadratic nature of the game.…”

Section: The Economic Benchmark 10mentioning

confidence: 99%

Policy uncertainty, symbiosis, and the optimal fiscal and monetary conservativeness

2009

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This paper extends a well-known macroeconomic stabilization game between monetary and fiscal authorities developed by Dixit and Lambertini (American Economic Review 93: 1522-1542) to multiplicative (policy) uncertainty. We find that even if fiscal and monetary authorities share a common output and inflation target (i.e., the symbiosis assumption), the achievement of the common targets is no longer guaranteed; under multiplicative uncertainty, in fact, a time consistency problem arises unless policymakers' output target is equal to the natural level. © 2009 Springer Science+Business Media, LLC

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Section: The Economic Benchmark 10mentioning

confidence: 99%

Policy uncertainty, symbiosis, and the optimal fiscal and monetary conservativeness

2009

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“…Our theory predicts that this variable is indicative of the degree of independence of a central bank. Indeed, while the turnover of the monetary policy decision maker is crucial in our model to explain a better (or worse) macroeconomic performance, the cross-country data on the turnover of central bank governor that we have are silent about where 1 8 Exceptions include Alesina and Gatti (1995), Waller and Walsh (1996), and, more recently Schellekens (2002).…”

Section: Empirical Predictions and Evidencementioning

confidence: 94%

“…Much of this literature implies (see, e.g., Rogoff, 1985) that society delegates policy to achieve lower inflation variability, but at the cost of inducing higher variability in output (for notable exceptions see, e.g., Alesina and Gatti (1995) and Schellekens (2002)). This prediction is not, as discussed in our empirical section, consistent with the data.…”

Section: Equilibrium and Welfarementioning

confidence: 99%

A Political Agency Theory of Central Bank Independence

Eggertsson

Borgne²

2003

IMF Working Papers

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We propose a theory to explain why, and under what circumstances, a politician endogenously gives up rent and delegates policy tasks to an independent agency. We apply this theory to monetary policy by extending a stochastic general equilibrium model. This model provides a theory of central bank independence that is unrelated to the standard time inconsistency problem which underlies all formalized theories of central bank independence. We derive five key predictions of the model and show that they are broadly consistent with the data. Finally, we show that while instrument independence of the central bank is desirable, goal independence is not. It is a general principle of human nature, that a man will be interested in whatever he possesses, in proportion to the firmness or precariousness of the tenure by which he holds it; will be less attached to what he holds by a momentary or uncertain title, than to what he enjoys by a durable or certain title; and, of course, will be willing to risk more for the sake of the one, than for the sake of the other."Hamilton (1788), Federalist Paper 71: The Duration in Office of the Executive "Many governments wisely try to depoliticize monetary policy by, for example, putting it in the hands of unelected technocrats with long terms of office and insulation from the hurly-burly of politics" (emphasis added) Blinder (1998), pp. 56-57.

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“…They suggest symmetry between CBI and its reputation and assert that the former can serve as a pre-commitment device. Other writers including Bade and Parkin (1985) and Alesina and Tabellini (1987), Lohmann (1992), Debelle and Fischer (1994) and Schellekens (2002), extend the basic idea of Kydland and PrescottÕs notion of 'rulesÕ and their impact on the behavior of central bankers.…”

Section: Introductionmentioning

confidence: 99%

Emerging Economies, Turnover Rates and Inflation Variability: A Comparison of Generalized Maximum Likelihood and SUR Models

Sintim-Aboagye

2006

Econ Change

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Theoretical exposition and empirical evidence in central bank independence (CBI) literature confirm an inverse relationship between inflation and measures of CBI mostly in developed economies. Based on this ex ante information on CBI-inflation tradeoff, this paper proposes two functional forms for the diagonal and off diagonal elements in the residual covariance matrix in the estimation process. The proposed functional forms are used in a generalized maximum likelihood and then in a generalized least squares (GLS) (with the restricted covariance matrix) framework for the empirical test. The results are compared to the outcome of an SUR model (unrestricted). The tests involve 14 emerging economies and covers the period 1960–1990. Compared to SUR, majority of results of GLS model in samples with and without outliers provide stronger and more significant evidence confirming the CBI-inflation tradeoff. Notably, the standard errors of the GLS estimates are lower than that of the SUR estimates. Without outliers, the GLS estimates show even lower standard errors as compared to the outcome of the SUR model. Low standard errors provide baseline indication of more accurate estimates. Copyright Springer Science+Business Media, Inc. 2005emerging economies, inflation, generalized least squares, central bank independence, C51, E58,

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Caution and Conservatism in the Making of Monetary Policy

Cited by 19 publications

References 29 publications

Policy uncertainty, symbiosis, and the optimal fiscal and monetary conservativeness

Policy uncertainty, symbiosis, and the optimal fiscal and monetary conservativeness

A Political Agency Theory of Central Bank Independence

Emerging Economies, Turnover Rates and Inflation Variability: A Comparison of Generalized Maximum Likelihood and SUR Models

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