What kind of central bank competence?

Abstract

How much information should a central bank (CB) have about (i) policy objec- tives and (ii) operational shocks to the effect of monetary policy? We consider a version of the Barro–Gordon credibility problem in which monetary policy sig- nals an inflation-biased CB’s private information on both these dimensions. We find that greater CBcompetence—more private information—about policy objec- tives is desirable while greater competence about operational shocks need not be. When the CB has less private information about operational shocks, the public infers that monetary policy depends more on the CB’s information about objec- tives. Inflation expectations become more responsive to monetary policy, which mitigates the CB’s temptation to produce surprise inflatio