American Economic Review: Vol. 97 No. 1 (March 2007)
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Competence Implies Credibility
Moscarini, Giuseppe. 2007. "Competence Implies Credibility." American Economic Review, 97(1): 37-63.
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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