Incomplete information in monetary policy games: Rules rather than a conservative central banker

Abstract

Time inconsistency in monetary policy can be addressed appointing a conservative central banker. But incomplete information about the central banker's preferences impairs the performance of delegation schemes. Firstly, the ensuing ex-ante variability of monetary response lowers welfare. Secondly, partial independence schemes may prove inadequate because reputation -not only legal arrangements - defines the actual degree of independence. The incumbent may exploit his reputation to impose too conservative policies whereas, if he lacks reputation, partial independence forces him to accommodate. As a result, simple rules may be preferred.