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Why Money Talks and Wealth Whispers: Monetary Uncertainty and Mystique

Sylvester C. W. Eijffinger, Marco Hoeberichts and Eric Schaling
Journal of Money, Credit and Banking
Vol. 32, No. 2 (May, 2000), pp. 218-235
DOI: 10.2307/2601240
Stable URL: http://www.jstor.org/stable/2601240
Page Count: 18
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Why Money Talks and Wealth Whispers: Monetary Uncertainty and Mystique
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Abstract

This paper analyzes the effect of monetary uncertainty on the inflationary bias and the variance of output and inflation. Monetary policy uncertainty is modeled as a shock to the central banker's preference for inflation stabilization relative to output stabilization that cannot be observed by the public. We find that the mean and variance of inflation increase with the variance of this preference shock. However, unlike other studies, we find that monetary uncertainty may very well have a positive effect on output stabilization and therefore also on society's welfare.

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