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Measuring the Time Inconsistency of US Monetary Policy

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  • PAOLO SURICO

Abstract

This paper offers an alternative explanation for the great inflation of the 1970s by measuring a novel source of monetary policy time inconsistency. In the presence of asymmetric preferences, the monetary authorities generate a systematic inflation bias through the private‐sector expectations of a larger policy response in recessions than in booms. The estimated Fed's implicit target for inflation has declined from the pre‐ to the post‐Volcker regime. The average inflation bias was about 1% before 1979, but this has disappeared over the last two decades, because the preferences on output stabilization were large and asymmetric only in the former period.

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  • Paolo Surico, 2008. "Measuring the Time Inconsistency of US Monetary Policy," Economica, London School of Economics and Political Science, vol. 75(297), pages 22-38, February.
    • Handle: RePEc:bla:econom:v:75:y:2008:i:297:p:22-38
    DOI: 10.1111/j.1468-0335.2007.00590.x
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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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