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Better Monetary Control May Decrease the Distortion of Stabilisation Policy: A Comment

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  • Letterie, Wilko

Abstract

Higher uncertainty about the effects of policy instruments reduces a policymaker's inclination to actively engage in shaping economic policy. If a credibility problem exists, then this is beneficial. However, in the case where the policymaker has private information about an economic shock, higher uncertainty is costly. Hence, the policymaker faces a trade-off when he decides on the degree of control of monetary instruments. It is shown that the optimal degree of uncertainty about the effects of policy depends on the economic preferences of the policymaker and the magnitude of the variance of the shock which is private information. Copyright 1997 by The editors of the Scandinavian Journal of Economics.

Suggested Citation

  • Letterie, Wilko, 1997. "Better Monetary Control May Decrease the Distortion of Stabilisation Policy: A Comment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(3), pages 463-470, September.
    • Handle: RePEc:bla:scandj:v:99:y:1997:i:3:p:463-70
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    Cited by:

    1. Giovanni Di Bartolomeo & Francesco Giuli & Marco Manzo, 2009. "Policy uncertainty, symbiosis, and the optimal fiscal and monetary conservativeness," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 36(4), pages 461-474, November.
    2. Giovanni Di Bartolomeo & Marco Manzo, 2010. "Fiscal Policy Under Balanced Budget And Indeterminacy: A New Keynesian Perspective," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(4), pages 455-472, September.
    3. Rotondi, Zeno, 2000. "Designing instrument rules for monetary stability: the optimality of interest-rate smoothing," Discussion Paper Series In Economics And Econometrics 8, Economics Division, School of Social Sciences, University of Southampton.
    4. Rotondi, Zeno, 2000. "Time consistent monetary policy reconsidered: may we have a deflationary bias too?," Discussion Paper Series In Economics And Econometrics 4, Economics Division, School of Social Sciences, University of Southampton.
    5. Sénégas, Marc-Alexandre & Vilmunen, Jouko, 1999. "The effects of transmission uncertainty on the flexibility-credibility tradeoff in monetary policy," Research Discussion Papers 14/1999, Bank of Finland.
    6. Di Bartolomeo, Giovanni & Giuli, Francesco, 2011. "Fiscal and monetary interaction under monetary policy uncertainty," European Journal of Political Economy, Elsevier, vol. 27(2), pages 369-375, June.
    7. Lawler, Phillip, 2007. "Strategic wage setting, inflation uncertainty and optimal delegation," European Journal of Political Economy, Elsevier, vol. 23(4), pages 1105-1118, December.
    8. Rotondi, Zeno, 2000. "Designing instrument rules for monetary stability: the optimality of interest-rate smoothing," Discussion Paper Series In Economics And Econometrics 0008, Economics Division, School of Social Sciences, University of Southampton.
    9. Lawler, Phillip, 2002. "Monetary uncertainty, strategic wage setting and equilibrium employment," Economics Letters, Elsevier, vol. 77(1), pages 35-40, September.
    10. Timo Henckel, 2010. "Monopolistic unions, Brainard uncertainty, and optimal monetary policy," Oxford Economic Papers, Oxford University Press, vol. 62(2), pages 307-322, April.
    11. SCHELLEKENS, Philip, 1999. "Optimal monetary policy delegation to conservative central banks," Working Papers 1999009, University of Antwerp, Faculty of Business and Economics.
    12. repec:zbw:bofrdp:1999_014 is not listed on IDEAS
    13. Rotondi, Zeno, 2000. "Time consistent monetary policy reconsidered: may we have a deflationary bias too?," Discussion Paper Series In Economics And Econometrics 0004, Economics Division, School of Social Sciences, University of Southampton.
    14. P Lawler, 2004. "Monetary Uncertainty, the Appropriate Choice of Central Banker and Social Welfare," Economic Issues Journal Articles, Economic Issues, vol. 9(2), pages 43-50, September.
    15. Schellekens, Philip, 2000. "Caution and conservatism in the making of monetary policy," Working Paper Series 0025, European Central Bank.
    16. Marc-Alexandre Senegas & Paul De Grauwe, 2004. "Transmission parameter uncertainty and heterogeneity in EMU: which federal monetary policy for the ECB?," Money Macro and Finance (MMF) Research Group Conference 2003 86, Money Macro and Finance Research Group.
    17. Phillip Lawler & Jonathan James, 2005. "Macroeconomic Shocks and Central Bank Disclosure Policy: Is increased Transparency Necessarily Beneficial?," Money Macro and Finance (MMF) Research Group Conference 2005 27, Money Macro and Finance Research Group.
    18. Schellekens, Philip, 2000. "Caution and conservatism in the making of monetary policy," Working Paper Series 25, European Central Bank.
    19. Kobayashi, Teruyoshi, 2003. "Multiplicative uncertainty in a model without inflationary bias," Economics Letters, Elsevier, vol. 80(3), pages 317-321, September.

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