Incomplete Information in Monetary Policy Games: Rules Rather Than a Conservative Central Banker

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.

…I do not believe that we should always get the best man for the post; often I fear that we should not even get a tolerable man.

(W. Bagehot, The Government of the Bank of England, in ‘Lombard Street’)