Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/197178 
Year of Publication: 
2018
Citation: 
[Journal:] Theoretical Economics [ISSN:] 1555-7561 [Volume:] 13 [Issue:] 3 [Publisher:] The Econometric Society [Place:] New Haven, CT [Year:] 2018 [Pages:] 1319-1368
Publisher: 
The Econometric Society, New Haven, CT
Abstract: 
This paper considers the optimal degree of monetary-discretion when the central bank conducts policy based on its private information about the state of the economy and is unable to commit. Society seeks to maximize social welfare by imposing restrictions on the central bank's actions over time, and the central bank takes these restrictions and the New Keynesian Phillips curve as constraints. By solving a dynamic mechanism design problem we find that it is optimal to grant "constrained discretion" to the central bank by imposing both upper and lower bounds on permissible inflation, and that these bounds should be set in a history-dependent way. The optimal degree of discretion varies over time with the severity of the time-inconsistency problem, and, although no discretion is optimal when the time-inconsistency problem is very severe, it is a transient phenomenon and some discretion is granted eventually.
Subjects: 
Rules versus discretion
monetary policy
New Keynesian model
private information
delegation
mechanism design
inflation targeting
JEL: 
D82
E52
E58
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc Logo
Document Type: 
Article

Files in This Item:
File
Size
785.72 kB
98.98 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.