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Time-consistency and credible monetary policy after the crisis

Author

Listed:
  • 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.

Suggested Citation

  • James M. Nason & Charles I. Plosser, 2012. "Time-consistency and credible monetary policy after the crisis," Business Review, Federal Reserve Bank of Philadelphia, issue Q2, pages 19-26.
  • Handle: RePEc:fip:fedpbr:y:2012:i:q2:p:19-26
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    File URL: http://www.philadelphiafed.org/research-and-data/publications/business-review/2012/q2/brq212_time-consistency-and-credible-monetary-policy-after-the-crisis.pdf
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    References listed on IDEAS

    as
    1. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters,in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
    2. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters,in: Monetary Policy Rules, pages 319-348 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. Todd Keister & Antoine Martin & James J. McAndrews, 2008. "Divorcing money from monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 41-56.
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