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Limited Commitment, Inaction and Optimal Monetary Policy

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  • Tokhir Mirzoev

    (Ohio State University)

Abstract

This paper examines the optimal frequency of monetary policy meetings when their schedule is pre-announced. Our contribution is twofold. First, we show that in the standard New Keynesian framework infrequent but periodic revision of monetary policy may be desirable even when there are no explicit costs of policy adjustment. Adjustment of policy on a pre-announced schedule de facto acts as a commitment not to adjust in intermediate periods. We find that at short horizons gains from such commitment outweigh welfare costs of central bank's inaction. Second, we solve for the optimal frequency of policy adjustment and characterize its determinants. When applied to the U.S. economy, our analysis suggests that the Federal Open Markets Committee should revise the federal funds target rate no more than twice a year.

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File URL: http://128.118.178.162/eps/mac/papers/0409/0409027.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0409027.

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Length: 49 pages
Date of creation: 29 Sep 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0409027

Note: Type of Document - pdf; pages: 49
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Web page: http://128.118.178.162

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Keywords: central bank; monetary policy; commitment; stabilization bias.;

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Cited by:
  1. Helge Berger, 2006. "Optimal Central Bank Design: Benchmarks for the ECB," CESifo Working Paper Series 1697, CESifo Group Munich.
  2. Helge Berger & Tonny Lybek & Volker Nitsch, 2006. "Central Bank Boards Around the World," IMF Working Papers 06/281, International Monetary Fund.
  3. Helge Berger & Volker Nitsch & Tonny Lybek, 2007. "Central Bank Boards around the World: Why does Membership Size Differ?," CESifo Working Paper Series 1897, CESifo Group Munich.
  4. Kobayashi, Teruyoshi, 2009. "Announcements and the effectiveness of monetary policy: A view from the US prime rate," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2253-2266, December.
  5. VanderHart, Peter G., 2009. "What is the best way to impede a central bank?," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 784-797, August.

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