Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/211845 
Year of Publication: 
1999
Series/Report no.: 
Bank of Finland Discussion Papers No. 14/1999
Publisher: 
Bank of Finland, Helsinki
Abstract: 
In this paper we address the issue of how parameter uncertainty affects the optimal degree of central bank conservatism.The analysis is conducted in the standard macroeconomic model of a monetary policy game embedding an expectational Phillips-curve. Multiplicative "Brainard" uncertainty is added to the model.This means that the central bank's policy instrument has a stochastic impact on inflation.This type of uncertainty is particularly interesting, since it affects the credibility-flexibility tradeoff in monetary policymaking.We show that if the flexibility problem dominates, an increase in uncertainty reduces optimal conservatism. However, increases in uncertainty can also require increases in the optimal degree of conservatism.This happens when the central bank has a sufficiently large credibility problem.This is particularly clear in the case of the introduction of uncertainty at the margin. Furthermore, the coefficient of variation of inflation appears to contain useful information about the relative size of the credibility problem and, hence, about how incipient uncertainty can affect optimal conservatism in actual economies.
Subjects: 
credibility
flexibility
monetary policy
conservatism
uncertainty
Persistent Identifier of the first edition: 
ISBN: 
951-686-623-9
Document Type: 
Working Paper

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