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A note on imperfect credibility

Author

Listed:
  • Ippei Fujiwara
  • Timothy Kam
  • Takeki Sunakawa

Abstract

We explore how outcomes of optimal monetary policy with loose commitment (Schaumburg and Tambalotti, 2007; Debortoli and Nunes, 2010) can be observationally equivalent, or interpretable as outcomes of deeper optimal policy under sustainable plans (Chari and Kehoe, 1990). Both interpretations of "imperfect credibility" in optimal monetary policy design are attempts to rationalize outcomes that lie in between the conventional extremes of optimal policy under commitment and under discretion. In a standard monetary-policy framework, when we match impulse responses of inflation and the output gap to large enough markup shocks, we find that a small probability (1 - a = 0.05) of replanning in the quasi/loose commitment world corresponds to N = 18 in the N-period punishment optimal sustainable monetary policy, in terms of observable outcomes. For plausible cases of loose-commitment model economies (with a between 0.77 and 1) we can find an observationally equivalent sustainable-plan economy indexed by some N.

Suggested Citation

  • Ippei Fujiwara & Timothy Kam & Takeki Sunakawa, 2016. "A note on imperfect credibility," CAMA Working Papers 2016-37, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2016-37
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2016-06/37_2016_fujiwara_kam_sunakawa.pdf
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    References listed on IDEAS

    as
    1. Kurozumi, Takushi, 2008. "Optimal sustainable monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1277-1289, October.
    2. Loisel, Olivier, 2008. "Central bank reputation in a forward-looking model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3718-3742, November.
    3. Schaumburg, Ernst & Tambalotti, Andrea, 2007. "An investigation of the gains from commitment in monetary policy," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 302-324, March.
    4. Davide Debortoli & Aeimit Lakdawala, 2016. "How Credible Is the Federal Reserve? A Structural Estimation of Policy Re-optimizations," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(3), pages 42-76, July.
    5. Sunakawa, Takeki, 2015. "A quantitative analysis of optimal sustainable monetary policies," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 119-135.
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    Cited by:

    1. Jean-Bernard Chatelain & Kirsten Ralf, 2017. "Can We Identify the Fed's Preferences?," Working Papers halshs-01549908, HAL.
    2. Jean-Bernard Chatelain & Kirsten Ralf, 2021. "Imperfect Credibility versus No Credibility of Optimal Monetary Policy," Revue économique, Presses de Sciences-Po, vol. 72(1), pages 43-63.
    3. Chatelain, Jean-Bernard & Ralf, Kirsten, 2020. "Hopf Bifurcation from New-Keynesian Taylor Rule to Ramsey Optimal Policy," EconStor Open Access Articles, ZBW - Leibniz Information Centre for Economics.
    4. J. Scott Davis & Ippei Fujiwara & Jiao Wang, 2018. "Dealing with Time Inconsistency: Inflation Targeting versus Exchange Rate Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(7), pages 1369-1399, October.
    5. Chatelain, Jean-Bernard & Ralf, Kirsten, 2020. "Hopf Bifurcation from New-Keynesian Taylor Rule to Ramsey Optimal Policy," EconStor Open Access Articles, ZBW - Leibniz Information Centre for Economics.

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    More about this item

    Keywords

    imperfect credibility; monetary policy; sustainable policy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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