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American Economic Review: Vol. 97 No. 1 (March 2007)
AER Volume. 97, Issue 1 | 
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Competence Implies Credibility
Article Citation
Moscarini, Giuseppe. 2007. "Competence Implies Credibility."
American Economic Review,
97(1): 37-63.
DOI: 10.1257/aer.97.1.37
DOI: 10.1257/aer.97.1.37
Abstract
The (reputation for) competence of a central bank at doing its job makes monetary
policy under discretion credible and transparent. Based on its reading of the
state of the economy, the central bank announces its policy intentions to the
public in a cheap-talk game. The precision of its private signal measures its
competence. The fineness of the equilibrium message space measures its credibility
and transparency. This is increasing in the competence/inflation bias ratio: the
public expects a competent central bank to use its discretion more to pursue its
"objective" targets than to surprise expectations and stimulate output. (JEL E52,
E58)
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Link to Appendix (96.36 KB)
Authors
Moscarini, Giuseppe
