Why Money Talks and Wealth Whispers: Monetary Uncertainty and Mystique

Sylvester C. W. Eijffinger · Marco M. Hoeberichts · Eric Schaling

55 citations0/0 files storedJournal of money credit and banking

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Monetary Policy and Economic Impact Market Dynamics and Volatility Economic theories and models

Abstract

This paper analyzes the effect of monetary uncertainty on the inflationary bias and the variance of output and inflation. Monetary policy uncertainty is modeled as a shock to the central banker’s preference for inflation stabilization relative to output stabilization that cannot be observed by the public. We find that the mean and variance of inflation increase with the variance of this preference shock. However, unlike other studies, we find that monetary uncertainty may very well have a positive effect on output stabilization and therefore also on society’s welfare.

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References

1985The Optimal Degree of Commitment to an Intermediate Monetary Target 1977Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule 1986A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information 1995Optimal contracts for central bankers 1967Uncertainty and the effectiveness of policy 1976Wage indexation: A macroeconomic approach 1992Optimal Commitment in Monetary Policy: Credibility versus Flexibility 1986Monetary mystique: Secrecy and central banking

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