Caution and Conservatism in Monetary Policymaking

This paper shows that imperfect monetary control induces caution in the setting of monetary policy, leading to improved credibility at the expense of worse output stabilization. The model also implies that poor credibility increases inflation volatility, and establishes that the delegation of monetary policy to an independent agent results in a trade-off between caution and conservatism. Finally, the model can be extended to address the transparency of policy formulation and the free lunch result of central bank independence.

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