Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/259767
Authors: 
Year of Publication: 
2021
Citation: 
[Journal:] Swiss Journal of Economics and Statistics [ISSN:] 2235-6282 [Volume:] 157 [Issue:] 1 [Article No.:] 3 [Publisher:] Springer [Place:] Heidelberg [Year:] 2021 [Pages:] 1-13
Publisher: 
Springer, Heidelberg
Abstract: 
This paper investigates the circumstances under which a central bank is more or less likely to deviate from the optimal monetary policy rule. The research question is addressed in a simple New Keynesian dynamic stochastic general equilibrium (DSGE) model in which monetary policy deviations occur endogenously. The model solution suggests that higher future central bank credibility attenuates the current period policy trade-off between a stable inflation rate and a stable output gap. Together with the loss of credibility after a policy deviation, this provides the central bank with an incentive to implement past policy commitments. The result is valid even if the central bank may recover credibility with some probability after a policy deviation. My main finding is that the central bank is willing to implement past policy commitments if a sufficient fraction of agents is not aware of the exact end date of the policy commitment. The result challenges the time-inconsistency argument against monetary policy commitments and provides a potential explanation for the repeated implementation of monetary policy commitments in reality.
Subjects: 
Optimal monetary policy
Strategic deviations
Forward guidance
Persistent Identifier of the first edition: 
Creative Commons License: 
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Document Type: 
Article

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