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What is the best way to impede a central bank?

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  • VanderHart, Peter G.
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    Abstract

    Recent work has found several ways of restricting central bank behavior to achieve much of the gain of commitment over discretion. This paper compares three such impediments: A quadratic penalty on interest rate changes, a fixed penalty on any rate change, and forced infrequency of rate change. All three achieve significant improvement over discretion, and often come close to interest rate rule commitment. The fixed penalty is frequently the best performing restriction, although the quadratic penalty does best in certain alternative parameterizations. Combinations are found to provide no improvement over the individual impediments alone.

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    Bibliographic Info

    Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

    Volume (Year): 49 (2009)
    Issue (Month): 3 (August)
    Pages: 784-797

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    Handle: RePEc:eee:quaeco:v:49:y:2009:i:3:p:784-797

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    Web page: http://www.elsevier.com/locate/inca/620167

    Related research

    Keywords: Monetary policy Commitment Discretion;

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