Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/172931
Authors: 
Bianchi, Francesco
Melosi, Leonardo
Year of Publication: 
2016
Series/Report no.: 
Working Paper 2016-15
Abstract: 
We develop and estimate a general equilibrium model to quantitatively assess the effects and welfare implications of central bank transparency. Monetary policy can deviate from active inflation stabilization and agents conduct Bayesian learning about the nature of these deviations. Under constrained discretion, only short deviations occur, agents' uncertainty about the macroeconomy remains contained, and welfare is high. However, if a deviation persists, uncertainty accelerates and welfare declines. Announcing the future policy course raises uncertainty in the short run by revealing that active inflation stabilization will be temporarily abandoned. However, this announcement reduces policy uncertainty and anchors inflationary beliefs at the end of the policy. For the U.S., enhancing transparency is found to increase welfare. The same result is found when we relax the assumption of perfectly credible announcements.
Subjects: 
Policy announcement
Bayesian learning
reputation
forward guidance
macroeconomic risk
uncertainty
inflation expectations
Markov-switching models
likelihood estimation
JEL: 
E52
D83
C11
Document Type: 
Working Paper

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