Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/130675
Authors: 
Bianchi, Francesco
Melosi, Leonardo
Year of Publication: 
2014
Series/Report no.: 
Working Paper, Federal Reserve Bank of Chicago 2014-16
Abstract: 
We develop and estimate a general equilibrium model in which monetary policy can deviate from active in.ation 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 con.dent 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.
JEL: 
E52
D83
C11
Document Type: 
Working Paper

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