Central bank credibility crucial for effective policy response to economic shocks.
The paper explores how a central bank's credibility affects its policy decisions when facing uncertainty about its model. Using a specific model, the researchers found that a central bank's credibility can greatly impact how it responds to economic shocks. Low credibility can lead to better policy outcomes when the bank prioritizes robustness. Even small credibility issues can significantly reduce policy effectiveness. The paper also introduces a new method to help central banks make decisions in uncertain situations.