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Time-consistency and credible monetary policy after the crisis

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  • James M. Nason
  • Charles I. Plosser

Abstract

The economic crisis and its aftermath have posed significant challenges to policymakers. To help meet those challenges, the Federal Reserve deployed several innovative policy tools to help relieve the stress in financial markets during the crisis. These tools have created their own significant challenges for the conduct of monetary policy in the post-crisis era. The wider range of policy options now available to policymakers makes it more difficult to credibly commit to a particular policy course, and this discretion poses a problem. This is because monetary policy is subject to a time-inconsistency problem. The new monetary policy tools introduced during the crisis can make such time-inconsistency problems worse by reinforcing the incentives for financial institutions or other sectors of the economy to take on excessive risk. In this article, Jim Nason and Charles Plosser discuss why it is important for central banks to consider ways in which they can limit discretion and use these new tools in a systematic way.

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Bibliographic Info

Article provided by Federal Reserve Bank of Philadelphia in its journal Business Review.

Volume (Year): (2012)
Issue (Month): Q2 ()
Pages: 19-26

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Handle: RePEc:fip:fedpbr:y:2012:i:q2:p:19-26

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Related research

Keywords: Monetary policy - United States ; Federal Reserve System - Regulations;

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  1. Todd Keister & Antoine Martin & James McAndrews, 2008. "Divorcing money from monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 41-56.
  2. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers 6768, National Bureau of Economic Research, Inc.
  3. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
  4. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
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