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Testing for optimal monetary policy via moment inequalities

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  • Laura Coroneo
  • Valentina Corradi
  • Paulo Santos Monteiro

Abstract

The specification of an optimizing model of the monetary transmission mechanism requires selecting a policy regime, commonly commitment or discretion. In this paper we propose a new procedure for testing optimal monetary policy, relying on moment inequalities that nest commitment and discretion as two special cases. The approach is based on the derivation of bounds for inflation that are consistent with optimal policy under either policy regime. We derive testable implications that allow for specification tests and discrimination between the two alternative regimes. The proposed procedure is implemented to examine the conduct of monetary policy in the United States economy.

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Bibliographic Info

Paper provided by Department of Economics, University of York in its series Discussion Papers with number 13/07.

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Date of creation: Mar 2013
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Handle: RePEc:yor:yorken:13/07

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Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
Phone: (0)1904 323776
Fax: (0)1904 323759
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Web page: http://www.york.ac.uk/economics/
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Keywords: Bootstrap; GMM; Moment Inequalities; Optimal Monetary Policy;

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Cited by:
  1. 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.

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