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Optimal reputation building in the New Keynesian model

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  • Lu, Yang K.
  • King, Robert G.
  • Pasten, Ernesto

Abstract

We study the optimal committed monetary policy when the private sector has imperfect information and has to infer the central banker׳s ability to commit. The optimal policy is designed to influence learning and improve the central banker׳s reputation of being committed. The reputation building implies that when a committed central banker first takes office, he should resist the temptation to stimulate output with initially high but declining inflation; he should reverse a missed inflation target rather than accommodate it; and he should adopt a less accommodative inflation response to a cost-push shock than a full commitment solution suggests.

Suggested Citation

  • Lu, Yang K. & King, Robert G. & Pasten, Ernesto, 2016. "Optimal reputation building in the New Keynesian model," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 233-249.
    • Handle: RePEc:eee:moneco:v:84:y:2016:i:c:p:233-249
    DOI: 10.1016/j.jmoneco.2016.10.010
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    2. Bursian, Dirk & Faia, Ester, 2018. "Trust in the monetary authority," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 66-79.
    3. Gáti, Laura, 2023. "Monetary policy & anchored expectations—An endogenous gain learning model," Journal of Monetary Economics, Elsevier, vol. 140(S), pages 37-47.
    4. Dengler, Thomas & Gerke, Rafael & Giesen, Sebastian & Kienzler, Daniel & Röttger, Joost & Scheer, Alexander & Wacks, Johannes, 2024. "A primer on optimal policy projections," Technical Papers 01/2024, Deutsche Bundesbank.

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