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Optimal Commitment Policy Under Noisy Information

  • Aoki, Kosuke

This Paper studies an advantage of commitment over discretion when a central bank observes only noisy measures of current inflation and output, in the context of an optimizing model with nominal-price stickiness. Under a commitment regime, if current policy turns out to be too expansionary (contractionary) because of the bank’s information problem, subsequent policies should be slightly contractionary (expansionary). By following this approach, the central bank can improve the trade-off between the fluctuations of its goal variables caused by economic shocks and those fluctuations caused by the bank’s response to measurement error.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3370.

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Date of creation: May 2002
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Handle: RePEc:cpr:ceprdp:3370
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