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Disagreement and Discretionary Monetary Policy

Author

Listed:
  • Marvin Goodfriend

    (Carnegie Mellon University)

  • Pierre Jinghong Liang

    (Carnegie Mellon University)

  • Gaoqing Zhang

    (Carnegie Mellon University)

Abstract

This paper identifies a new coordination motive endogenously induced by a central bank’s lack of commitment in the presence of information imperfection. We show that when differentially informed economic agents disagree about the central bank’s inflation incentives, discretion in monetary policymaking induces agents to coordinate by “forecasting the forecasts of others” in order to forecast the central bank’s policy actions. In particular, the induced coordination mechanism compels the central bank to choose monetary policy that responds to fluctuations in the average belief about its incentive. As a result, discretion has the potential to vastly increase fluctuations in employment and inflation, especially when the disagreement among agents is low. More broadly, our paper makes an argument for the inclusion of information diversity among agents in monetary policy discussions and in the characterization of the inflation dynamics.

Suggested Citation

  • Marvin Goodfriend & Pierre Jinghong Liang & Gaoqing Zhang, 2025. "Disagreement and Discretionary Monetary Policy," International Journal of Central Banking, International Journal of Central Banking, vol. 21(1), pages 387-445, January.
    • Handle: RePEc:ijc:ijcjou:y:2025:q:1:a:8
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    References listed on IDEAS

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    1. Mailath, George J. & Samuelson, Larry, 2006. "Repeated Games and Reputations: Long-Run Relationships," OUP Catalogue, Oxford University Press, number 9780195300796.
    2. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    3. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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