Better Monetary Control May Decrease the Distortion of Stabilisation Policy: A Comment

Higher uncertainty about the effects of policy instruments reduces a policymaker's inclination to actively engage in shaping economic policy. If a credibility problem exists, then this is beneficial. However, in the case where the policymaker has private information about an economic shock, higher uncertainty is costly. Hence, the policymaker faces a trade-off when he decides on the degree of control of monetary instruments. It is shown that the optimal degree of uncertainty about the effects of policy depends on the economic preferences of the policymaker and the magnitude of the variance of the shock which is private information.