eprintid: 22720 rev_number: 15 eprint_status: archive userid: 1482 importid: 105 dir: disk0/00/02/27/20 datestamp: 2017-01-16 14:01:35 lastmod: 2021-10-27 13:36:56 status_changed: 2017-03-21 11:01:27 type: article metadata_visibility: show creators_name: King, Robert G. creators_name: Lu, Yang creators_name: Pasten, Ernesto creators_idrefppn: 241586887 creators_affiliation: Toulouse School of Economics, France;Central Bank of Chile, Chile title: Optimal reputation building in the New Keynesian model ispublished: pub subjects: subjects_ECO abstract: How should policy be optimally designed when a monetary authority faces a private sector that is somewhat skeptical about policy announcements and which interprets economic data as providing evidence about the monetary authorityís preferences or its ability to carry through on policy plans? To provide an answer to this question, we extend the standard New Keynesian macroeconomic model to include imperfect ináation control (impementation error relative to an ináation action) and Bayesian learning by private agents about whether the monetary authority is the committed type (capable of following through on announced plans) or an alternative type (producing higher and more volatile ináation). In a benchmark case, we Önd that optimal policy involves dramatic anti-ináation actions which include an interval of deáation during the early stages of a plan, motivated by investing in a reputation for strength. Such policies resemble recommendations during the 1980s for a "cold turkey" approach to disináation. However, we also Önd that such policy is not robustly optimal. A more "gradualist" policy arises if the initial level of credibility is very low. We also investigate a setting where the alternative monetary authority follows a simple behavioral rule that mimics variations in the committed authorityís policy action but with a bias toward higher and more volatile ináation. In this case, which we call a "tag along" alternative policymaker, a form of gradualism is always optimal. date: 2016-12 date_type: published publisher: Elsevier id_number: 10.1016/j.jmoneco.2016.10.010 official_url: http://tse-fr.eu/pub/31336 faculty: tse divisions: tse language: en has_fulltext: FALSE doi: 10.1016/j.jmoneco.2016.10.010 view_date_year: 2016 full_text_status: none publication: Journal of Monetary Economics volume: 84 pagerange: 233-249 refereed: TRUE issn: 0304-3932 oai_identifier: oai:tse-fr.eu:31336 harvester_local_overwrite: oai_set harvester_local_overwrite: issn harvester_local_overwrite: faculty harvester_local_overwrite: publisher harvester_local_overwrite: creators_affiliation harvester_local_overwrite: id_number harvester_local_overwrite: doi harvester_local_overwrite: creators_idrefppn oai_lastmod: 2017-02-21T16:05:50Z oai_set: tse oai_set: ut1c site: ut1 citation: King, Robert G., Lu, Yang and Pasten, Ernesto (2016) Optimal reputation building in the New Keynesian model. Journal of Monetary Economics, 84. pp. 233-249.