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Delegating optimal monetary policy inertia

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  • Florin Bilbiie

    (CEPR - Center for Economic Policy Research - CEPR, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

In a forward-looking business cycle model, central banks can achieve the (timeless)optimal commitment equilibrium even in the absence of a commitment technology, if they are delegated with an objective function that is different from the societal one. The paper develops a general linear-quadratic method to solve for the optimal delegation parameters that generate the optimal amount of inertia in a Markov-perfect equilibrium, and studies the optimal design of some policy regimes that are nested within this framework: the (squared) optimal targeting rule; inflation, output-gap growth and nominal income growth targeting; and inflation and output-gap contracts.

Suggested Citation

  • Florin Bilbiie, 2014. "Delegating optimal monetary policy inertia," PSE-Ecole d'économie de Paris (Postprint) hal-01162224, HAL.
    • Handle: RePEc:hal:pseptp:hal-01162224
    DOI: 10.1016/j.jedc.2014.08.019
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    Cited by:

    1. Ida, Daisuke, 2020. "Sectoral inflation persistence and optimal monetary policy," Journal of Macroeconomics, Elsevier, vol. 65(C).
    2. Taisuke Nakata & Sebastian Schmidt, 2019. "Gradualism and Liquidity Traps," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 182-199, January.
    3. Kohei Hasui & Teruyoshi Kobayashi & Tomohiro Sugo, 2019. "Irreversible monetary policy at the zero lower bound," Discussion Papers 1906, Graduate School of Economics, Kobe University.
    4. Taisuke Nakata & Sebastian Schmidt & Paul Yoo, 2018. "Speed Limit Policy and Liquidity Traps," IMES Discussion Paper Series 18-E-06, Institute for Monetary and Economic Studies, Bank of Japan.
    5. Marest, Luc & Thurston, Thom, 2018. "Measuring the value of central bank commitment in the benchmark New Keynesian model," Journal of Macroeconomics, Elsevier, vol. 58(C), pages 249-265.
    6. Taisuke Nakata & Sebastian Schmidt, 2019. "Gradualism and Liquidity Traps," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 182-199, January.
    7. Kohei Hasui, 2021. "How robustness can change the desirability of speed limit policy," Scottish Journal of Political Economy, Scottish Economic Society, vol. 68(5), pages 553-570, November.
    8. Hasui, Kohei & Kobayashi, Teruyoshi & Sugo, Tomohiro, 2021. "Optimal irreversible monetary policy," European Economic Review, Elsevier, vol. 134(C).
    9. Ida, Daisuke, 2023. "Liquidity-constrained consumers and optimal monetary policy in a currency union," Journal of International Money and Finance, Elsevier, vol. 131(C).
    10. Florin O. Bilbiie, 2019. "Optimal Forward Guidance," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(4), pages 310-345, October.
    11. Martin Bodenstein & Junzhu Zhao, 2019. "On Targeting Frameworks And Optimal Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(8), pages 2077-2113, December.
    12. Ida, Daisuke & Okano, Mitsuhiro, 2023. "Optimal monetary policy delegation in a small-open new Keynesian model with robust control," Economic Modelling, Elsevier, vol. 120(C).

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    More about this item

    Keywords

    discretion and commitment; inertia; optimal delegation; stabilization bias; timeless-optimal policy; inflation; output gap growth; nominal income growth targeting;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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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