Monetary Policy Uncertainty And Macroeconomic Performance: An Extended Non-Bayesian Framework

The existing literature has shown that less political uncertainty, or more central bank transparency, may worsen macroeconomic performance by raising the nominal wage. The authors extend this analysis to a non-Bayesian framework, where there is some aversion to ambiguity. They show that the result found in the literature under the Bayesian approach does not hold when the distance from the Bayesian case is large enough, or when a reduction in "Knightian uncertainty" is considered. Then, less uncertainty, or more transparency of the central bank, does not raise the nominal wage and, as a consequence, macroeconomic performance is not worsened (and is in general strictly improved).

Provided by: Paris-Jourdan Sciences Economiques Topic: CXO Date Added: Apr 2011 Format: PDF

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