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This paper documents the opaqueness of central banks about the economic models they use to choose policy but argues that this is largely due to the lack of consensus about the correct model of the economy within the economic profession. The latter is illustrated by contrasting three currently popular models of the transmission mechanism. Although the inflation targets of Western central banks are currently quite clear they tend to be hazy about their output targets and about whether they are strictor flexible inflation targeters (in Svensson's (1997) sense), and in the second case, how flexible. They are remarkably silent about the shape of their loss function in the entire range of output gaps. The second part of the paper first reviews the case for believing that at least some central banks are, given inflation, more averse to negative than to positive output gaps and then investigates the consequences of this asymmetry for average inflation. It is shown, for both an expactations augmented Phillips curve as well as for a New -Keynesian transmission mechanism, that in the presence of uncertainty about the upcoming state of the economy flexible inflation targeters with assymetric objectives induce an onflation bias even if their output target is the potential level. Furtehrmore the inflationary tendencies of policymakers who believe in sticky prices are stronger than of those who do not. But, provided prices are really in sticky, the economy is non neutral even in the long run, and the policies of the former also induce a higher level of output. The consequences of transparency about those mechanisms for credibility are evaluated.

AbstractThe point of departure of this short paper is that, in order to preserve the effectiveness of monetary policy in a world increasingly flooded by private digital currencies, central banks (CBs) will eventually have to issue their own digital currencies. The paper presents two proposals for the implementation of such a currency: A moderate proposal in which only the banking sector continues to have access to deposits at the CB and a radical one in which the entire private sector is allowed to hold digital currency deposits at the CB. The paper contrasts the implications of those two polar paths to a CBDC for the funding of banks, the allocation of credit to the economy, for welfare and for political feasibility. One section of the paper shows that the radical implementation may pave the way toward a narrow banking system and dramatically reduce the need for deposit insurance in the long run. The paper evaluates the relative merits of issuing a currency on a blockchain using a permissionless distributed ledger technology in comparison to a centralized (permissioned) blockchain ledger operated by the CB and concludes that the latter dominates the former in more than one dimension.