Hawkish Dove or Dovish Hawk? Optimal Monetary Policy with Reputational Concerns

Seminario de investigación del IIEP

Hawkish Dove or Dovish Hawk? Optimal Monetary Policy with Reputational Concerns

Expositor | Pedro Martinez Bruera | MIT

Abstract

A central bank’s reputation depends on how hawkish the private sector thinks it is. Using cross-sectional variation of private forecasts about US inflation and output gap, we document i) reputation responds to monetary policy surprises ii) is mean-reverting iii) does not respond to non-monetary shocks such as demand and cost-push shocks iv) better reputation reduces the passthrough of shocks to inflation expectations. We embed these facts in a learning model and solve the optimal monetary policy problem. Relative to the solution under discretion, the optimal policy is more hawkish: by acting more hawkish, the central bank signals stronger commitment to inflation stability, anchoring expectations in the future, and reducing the future cost of disinflation.

Coautores | Tomás E. Caravello & Alex Carrasco-Martínez

Lugar | FCE-UBA | Aula 223B