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Estimating Central Bank Preferences under Commitment and Discretion

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  • GREGORY E. GIVENS

Abstract

This paper explains US macroeconomic outcomes with an empirical new-Keynesian model in which monetary policy minimizes the central bank's loss function. The presence of expectations in the model forms a well-known distinction between two modes of optimization, termed commitment and discretion. I estimate the model separately under each policy using maximum likelihood over the Volcker-Greenspan-Bernanke period. Comparisons of fit reveal that the data favor the specification with discretionary policy. Estimates of the loss function weights point to an excessive concern for interest rate smoothing in the commitment model but a more balanced concern relative to inflation and output stability in the discretionary model.

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File URL: http://hdl.handle.net/10.1111/j.1538-4616.2012.00522.x
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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 44 (2012)
Issue (Month): 6 (09)
Pages: 1033-1061

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Handle: RePEc:mcb:jmoncb:v:44:y:2012:i:6:p:1033-1061

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Citations

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Cited by:
  1. Kirsanova, Tatiana & Leith, Campbell & Chen, Xiaoshan, 2013. "How Optimal is US Monetary Policy?," SIRE Discussion Papers 2013-53, Scottish Institute for Research in Economics (SIRE).
  2. Laura Coroneo & Valentina Corradi & Paulo Santos Monteiro, 2013. "Testing for optimal monetary policy via moment inequalities," Discussion Papers 13/07, Department of Economics, University of York.
  3. Tatiana Kirsanova & Stephanus le Roux, 2013. "Commitment vs. discretion in the UK: An empirical investigation of the monetary and fiscal policy regime," Working Papers 2013_07, Business School - Economics, University of Glasgow.
  4. Andreza Aparecida Palma & Marcelo Savino Portugal, 2014. "Preferences Of The Central Bank Of Brazil Under The Inflation Targeting Regime: Estimation Using A Dsge Model For A Small Open Economy," Anais do XLI Encontro Nacional de Economia [Proceedings of the 41th Brazilian Economics Meeting] 055, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  5. Paez-Farrell, Juan, 2012. "Should central bankers discount the future? A note," Economics Letters, Elsevier, vol. 114(1), pages 20-22.
  6. Givens, Gregory & Salemi, Michael, 2012. "Inferring monetary policy objectives with a partially observed state," MPRA Paper 39353, University Library of Munich, Germany.

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