بانک های مرکزی و ابهام

The purpose of this paper is to discuss the effects of ambiguity (or ‘non-calculable risk’) on the public's expectations about inflation and its impact on central bank policy. The effects of ambiguity are addressed in a textbook setting with a short run aggregate supply curve. Ambiguity about monetary policy can be characterised as a loss of central bank credibility. When the public is pessimistically inclined, its consequences are excessive inflation expectations and a national income below its natural rate. This result is obtained both in the context of ‘discretion’ and of ‘inflation targeting’, although the impact of ambiguity is less pronounced in the latter case. If the public is optimistic with respect to the monetary policy of the central bank, loss of credibility has no impact.

What does it take to establish confidence in a central bank? This question is of major importance for monetary policy makers. But answering it is tedious. Firstly, confidence is in the mind of the beholder. It is determined by cognitive processes that are difficult to reconcile with the established paradigms of economic decision making. Worse, it is not clear what the precise meaning of ‘confidence’ is in this setting. There are models that provide precise interpretations of ‘reputation’ in the context of incomplete information: they rely on the inability of the public to learn the ‘true’ preferences and objectives of the central bank. Depending on its ‘true’ preferences, the central bank may be tempted to deceive the public, by pretending to have different preferences. When considering a finite time horizon, the central bank eventually shows its true face. Meanwhile, the longer it keeps up appearances, the more likely it seems to the public that the pretended preferences are its true preferences and the better its reputation is.1 But this hardly is the mechanism that determines the confidence in present-day central banks. The actual decision processes in the leading central banks make it impossible to hide their true preferences for a sustained period of time. We must therefore consider different ways to conceptualise the meaning of ‘confidence’ in central banks. This paper follows the approach to understanding confidence by studying situations in which it is absent, as taken in Spanjers (1998/2005). We consider the presence of ambiguity to be the main characteristic of situations in which there is a lack of confidence. This leads us to analyse the impact of ambiguity on the choice and effectiveness of monetary policy. We distinguish between ‘calculable’ and ‘non-calculable’ risk and refer to the latter as ambiguity.2Knight (1921) considers entrepreneurs to be specialists in dealing with situations of ambiguity, i.e. situations for which there is no relevant experience to guide decision making. Keynes (1937) considers ambiguity to be one of the most characteristic features of decision making under uncertainty:3 […][A]t any given time facts and expectations were assumed to be given in a definite and calculable form; and risks, of which, though admitted, not much notice was taken, were supposed to be capable of an exact actuarial computation. The calculus of probability […] was supposed to be capable of reducing uncertainty to the same calculable status as that of certainty itself […]. Actually, however, we have, as a rule, only the vaguest idea of any but the most direct consequences of our acts. Sometimes we are not much concerned with their remoter consequences, even though time and change may make much of them. But sometimes we are intensely concerned with them, more so, occasionally, than with the immediate consequences. […] […] By ‘uncertain’ knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty […]. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealth owners in the social system in 1970. About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know. Keynes continues:4 Now a practical theory of the future […] has certain marked characteristics. In particular, being based on so flimsy a foundation, it is subject to sudden and violent changes. The practice of calmness and immobility, of certainty and security, suddenly breaks down. New fears and hopes will, without warning, take charge of human conduct. The forces of disillusion may suddenly impose a new conventional basis of valuation. All these pretty, polite techniques, made for a well-panelled board room and a nicely regulated market, are liable to collapse. At all times vague panic fears and equally vague and unreasoned hopes are not really lulled, and lie but a little way below the surface. Modern examples of ambiguity include global warming, the BSE-crisis, bird-flu, the Gulf War, the South–East Asian crisis, New Economy technologies and the impact of 9/11. Risk may fail to be calculable for two basic reasons. Firstly, it may not be possible to assign a unique (subjective) probability distribution to different scenarios for the future. Secondly, it may be difficult to associate a unique outcome to each scenario. In either case there is ambiguity. The next question is how decisions are made in the face of ambiguity. As already indicated in the quotation from Keynes, decisions will depend on the decision-maker's attitude with respect to it. Optimists will hope for the best, pessimists will fear the worst. If one insists on referring to subjective probabilities, it represents a situation in which the decision-maker's probability assessment depends in a specific way on his choice of action.5 The first piece of evidence that decisions under ambiguity may fail to be compatible with the subjective expected utility approach was provided by the famous thought-experiment in Ellsberg (1961). Schmeidler (1982/89) and Gilboa (1987) provide an axiomatic foundation for decision making under ambiguity that can match that of subjective expected utility theory as provided by Savage (1954) and Anscombe and Aumann (1963). After this breakthrough, economists started to modify their standard analytical tools to deal with ambiguity.6 Against this background, we examine the impact of ambiguity on monetary policy. The insight that ambiguity or incalculable risk plays an important role in monetary phenomena which include expectations is not new. Keynes, when discussing his General Theory in 1937, for instance writes:7 […] [P]artly on reasonable and partly on instinctive grounds, our desire to hold money as a store of wealth is a barometer of the degree of our distrust of our own calculations and conventions concerning the future. […] The possession of actual money lulls our disquietude; and the premium which we require to make us part with money is the measure of the degree of our disquietude. The significance of this characteristic of money has usually been overlooked; and in so far as it has been noticed, the essential nature of the phenomenon has been misdescribed. For what has attracted attention has been the quantity of the money which has been hoared, and importance has been attached to this because it has been supposed to have a direct proportionate effect on the price level […] [F]luctuations in the degree of confidence are capable of having quite a different effect, namely, in modifying not the amount that is actually hoarded, but the amount of the premium which has to be offered to induce people not to hoard. […] This, expressed in a very general way, is my theory of the interest rate. We analyse the monetary policy of a central bank in the context of a short run aggregate supply curve as in Mankiw (2003).8 In this framework, the public resents finding itself making false inflation predictions. The central bank dislikes inflation deviating from its optimal level or output being below its natural rate, but it likes output to exceed its natural rate. Our analysis distinguishes between strategic ambiguity on the one hand and state ambiguity of the central bank over the position of the short run aggregate supply curve on the other. Whereas the concept of strategic ambiguity derives from a game-theoretic setting, state ambiguity is closely related to the literature on robustness and on robust control. Friedman is claimed to have ‘expressed an enduring concern when he recommended that designers of macroeconomic policy rules acknowledge model uncertainty. His style of analysis revealed that he meant a kind of model uncertainty that could not be formalized in terms of objective or subjective probability distributions over models'.9 It seems that Friedman was concerned with ambiguity as described above. The literature on robustness springs from the observation that policy makers typically do not have complete confidence in their models. Therefore, rather than reaching for the optimal decision in one specific model, they would prefer to follow a policy that performs reasonably well over a range of plausible models. One problem with this approach is that the selection of the set of plausible benchmark models implicitly determines the objective function of the decision-maker. So ambiguity on structural parameters also implies ambiguity on the correct loss function.10 When applying robust control, the central bank bases its monetary policy on a distorted model that contains the worst conceivable development path, the so-called ‘worst case’, but than acts as if model uncertainty no longer exists.11 In some settings central banks, when facing parameter uncertainty, pursue a more aggressive policy than in its absence.12 In another interpretation of robust control, however, it is claimed that the central bank follows the same aggressive policy when it takes its approximation as the true model, but maximizes a target function that reflects an additional risk sensitivity.13 The model in the present paper is broadly in line with the latter interpretation of robust control. The decision-makers in the model consider standard objective functions that are extended with a term that reflects an additional sensitivity to uncertainty. Contrary to the above line of modelling, though, this additional term does not reflect an additional sensitivity to risk, but rather to ambiguity. Furthermore, adding this term is not ad hoc, but a natural result from applying the approach of Choquet Expected Utility to the problem at hand, for which we consider both a discretionary monetary policy and a policy of inflation targeting. To be fair, our model is not the first to apply the Choquet Expected Utility approach to monetary policy. Caglianrini and Heath (2000) notice that ambiguity can explain why interest rates typically move in steps, whereas one would expect them to move smoothly. Although they prefer the formalisation of ambiguity by Bewley, 1986 and Bewley, 1987, their result seems a variation on Dow and Werlang (1992). Brock, Durlauf, and West (2004) consider a central bank with a Choquet expected objective function that represents a pessimistic decision-maker. The analysis of Chprits and Schipper (2003) is closer to the present paper, as they consider ‘double-sided intransparency’. They analyse the potential impact of ‘intransparency’, which they model as ambiguity, on the interaction between a central bank and a trade union, with a Philips-curve describing the trade-off between inflation and unemployment. The central bank follows an intransparent monetary policy, whereas the trade union follows an intransparent wage policy.14 The aim of our analysis, by contrast, is to provide a framework in which to discuss the role of confidence and credibility in contemporary central bank policy in a setting where both the central bank and the public face ambiguity.15 Another difference lies in the way ambiguity is treated. Whereas Chprits and Schipper confine their analysis to pessimism, we allow for an optimistic public as well. Furthermore, we introduce an innovation to the literature on ambiguous beliefs by expressly considering the role of perceived upside and downside risk. Finally, we discuss the real-life example of the European Central Bank to support the relevance of our argument. In the next section, we discuss decision making under ambiguity and the equilibrium concept we use in this paper. In Section 3 we derive the effect of strategic ambiguity about monetary policy on the inflation expectations of the public. We show that this strategic ambiguity results in excessive inflation expectations by a pessimistic public, which negatively affect output. We proceed by including the central bank in the analysis in Section 4. Both for a discretionary and an inflation targeting monetary policy, the effects of ambiguity point in the same direction, but inflation targeting dampens its impact. While the public is exposed to strategic ambiguity, the central bank faces ambiguity about the effectiveness of surprise inflation, which leads to interesting results. For a monetary policy with a flexible inflation target, ambiguity on the effectiveness of surprise inflation only influences monetary policy if the public has less than full confidence in the central bank. More surprisingly, when ambiguity does have an impact, it leads a cautious (i.e. pessimistic) central bank to loosen monetary policy, in order to increase inflation. In Section 5 we discuss the policy framework of the European Central Bank in the light of the model and results of this paper. Concluding remarks and suggestions for further research are provided in Section 6.

This paper shows that ambiguity may affect monetary policy in a number of ways. When considering the strategic ambiguity faced by a pessimistically inclined public (the most plausible case), we find that a lack of confidence in the central bank is harmful. It leads to a level of output that is below its natural rate. This effect is larger when central banks can choose their monetary policy at their discretion compared to them adhering to an inflation target. Regarding the state ambiguity faced by central banks, we similarly find that the impact of state ambiguity on inflation is less if monetary policy is guided by credible announcements, rather than being left to the central banks' discretion. One may feel that, thus far, an important question regarding our model has not been addressed: Is the model in line with the usual assumption of rational expectations? In a straight forward interpretation this would mean to ask if the equilibrium values of the decision-makers' point expectations equal the expected values of the relevant variables in equilibrium. Is hardly surprising that this property fails to hold, as the ambiguity faced by the decision-makers is explicitly taken into account and ‘distorts’ the objective functions that determine the equilibrium beliefs. A more sophisticated version of rational expectations, which refers to perfect foresight regarding the outcomes in all states of nature, does apply. Due to the presence of ambiguity, however, this perfect foresight no longer translates into the expected value of the (degenerated) probability distribution that is applied in this paper. Finally, we note that ambiguity has no impact on the expected rate of inflation of an optimistic public. For further, more empirically oriented, research on the issues raised in this paper, we would like to make two suggestions. Firstly, to obtain broader insights on the effects of strategic ambiguity faced by the public, it would be useful to have a closer look at the effects monetary policy of in countries in Central and Eastern Europe. After disposing of their communist governments and starting on the way to becoming market economies, the public in the Central and Eastern European countries faced a higher level of ambiguity about their central banks and their monetary policies due to the lack of relevant past experience with these central banks. Tough monetary policy in the early days may have helped to establish confidence in some central banks. The prospect of membership of the EU may also have had a confidence enhancing effect, as it reduced the scope for governments and central banks to pursue unpredictable monetary policies. According to the analysis of this paper, this gain in confidence may lead to lower inflation rates and output levels closer to their natural rate. It would be interesting to see if empirical data supports the conclusions of this paper and, if so, to establish the order of magnitude of the effects of ambiguity. Secondly, one may want to have a closer look at the United States to examine the impact of optimism by the public regarding the central bank. In recent years, the attitude of the public regarding the Federal Reserve, with the glorification of Alan Greenspan, has become one of optimism. When the public is optimistic regarding the actions of the central bank, ambiguity has no impact on the expected rate of inflation. An optimistic public associates ambiguity with the best, rather than with the worst plausible outcome. For the public, the best outcome occurs when the actual rate of inflation equals the rate of inflation it expects. It would be interesting to see if empirical evidence supports this hypothesis and, if so, if there are indications about what may have caused the attitude of the public to shift from pessimism to optimism. It may also provide insights on how, in general, to best hand-over of the chair of the Federal Reserve without compromising the optimistic attitude of the public or creating strategic ambiguity over monetary policy.