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Estimating Central Bank Preferences under Commitment and Discretion

  • Gregory Erin Givens

This paper explains US macroeconomic outcomes with an empirical new-Keynesian model in which monetary policy minimizes the central bank's loss function. The presence of expectations in the model forms a well-known distinction between two modes of optimization, termed commitment and discretion. I estimate the model separately under each policy using maximum likelihood over the Volcker-Greenspan-Bernanke period. Comparisons of fit reveal that the data favor the specification with discretionary policy. Estimates of the loss function weights point to an excessive concern for interest rate smoothing in the commitment model but a more balanced concern relative to inflation and output stability in the discretionary model.

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File URL: http://capone.mtsu.edu/berc/working/preferences.pdf
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Paper provided by Middle Tennessee State University, Department of Economics and Finance in its series Working Papers with number 200905.

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Date of creation: Jun 2009
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Handle: RePEc:mts:wpaper:200905
Contact details of provider: Web page: http://www.mtsu.edu/~berc/working/Economics_Working_Papers.html
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