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Measuring the Time-Inconsistency of US Monetary Policy

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  • Paolo Surico

    (Bocconi University)

Abstract

This paper offers an alternative explanation for the behavior of postwar US inflation by measuring a novel source of monetary policy time- inconsistency due to Cukierman (2002). In the presence of asymmetric preferences, the monetary authorities end up generating a systematic inflation bias through the private sector expectations of a larger policy response in recessions than in booms. Reduced-form estimates of US monetary policy rules indicate that while the inflation target declines from the pre- to the post-Volcker regime, the average inflation bias, which is about one percent before 1979, tends to disappear over the last two decades. This result can be rationalized in terms of the preference on output stabilization, which is found to be large and asymmetric in the former but not in the latter period.

Suggested Citation

  • Paolo Surico, 2004. "Measuring the Time-Inconsistency of US Monetary Policy," Macroeconomics 0401006, EconWPA.
  • Handle: RePEc:wpa:wuwpma:0401006
    Note: Type of Document - pdf; pages: 22
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    References listed on IDEAS

    as
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    Cited by:

    1. Paolo Surico, 2002. "Inflation Targeting and Nonlinear Policy Rules: the Case of Asymmetric Preferences," Macroeconomics 0210002, EconWPA, revised 23 Feb 2004.
    2. Pierdzioch, Christian & Rülke, Jan-Christoph & Stadtmann, Georg, 2015. "Central banks’ inflation forecasts under asymmetric loss: Evidence from four Latin-American countries," Economics Letters, Elsevier, vol. 129(C), pages 66-70.
    3. S. Rajan, Ramkishen, 2010. "The Evolution and Impact of Asian Exchange Rate Regimes," ADB Economics Working Paper Series 208, Asian Development Bank.
    4. Matthews, Kent, 2013. "Risk management and managerial efficiency in Chinese banks: A network DEA framework," Omega, Elsevier, vol. 41(2), pages 207-215.
    5. Efrem Castelnuovo, 2006. "Describing The Fed’S Conduct With Taylor Rules: Is Interest Rate Smoothing Important?," The IUP Journal of Monetary Economics, IUP Publications, vol. 0(3), pages 57-77, August.
    6. Peter N. Ireland, 2007. "Changes in the Federal Reserve's Inflation Target: Causes and Consequences," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 1851-1882, December.
    7. Mustafa Caglayan & Ozge Kandemir & Kostas Mouratidis, 2012. "The Impact of Inflation Uncertainty on Economic Growth: A MRS-IV Approach," Working Papers 2012025, The University of Sheffield, Department of Economics.
    8. Ramkishen S. Rajan, 2011. "Management of Exchange Rate Regimes in Emerging Asia," Macroeconomics Working Papers 23214, East Asian Bureau of Economic Research.
    9. Karin Mayr & Johann Scharler, 2009. "Asymmetric Fiscal Stabilization Policy and the Public Deficit: Theory and Evidence," Vienna Economics Papers 0908, University of Vienna, Department of Economics.
    10. Pierdzioch, Christian & Rülke, Jan-Christoph & Stadtmann, Georg, 2012. "On the loss function of the Bank of Canada: A note," Economics Letters, Elsevier, vol. 115(2), pages 155-159.
    11. William Gatt, 2018. "Housing boom-bust cycles and asymmetric macroprudential policy," CBM Working Papers WP/02/2018, Central Bank of Malta.
    12. Ikeda, Taro, 2010. "Time-varying asymmetries in central bank preferences: The case of the ECB," Journal of Macroeconomics, Elsevier, vol. 32(4), pages 1054-1066, December.
    13. Chesang, Laban K. & Naraidoo, Ruthira, 2016. "Parameter uncertainty and inflation dynamics in a model with asymmetric central bank preferences," Economic Modelling, Elsevier, vol. 56(C), pages 1-10.
    14. Rülke, Jan-Christoph & Pierdzioch, Christian, 2014. "Government Forecasts of Budget Balances Under Asymmetric Loss: International Evidence," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100317, Verein für Socialpolitik / German Economic Association.
    15. Pontines, Victor & Rajan, Ramkishen S., 2011. "Foreign exchange market intervention and reserve accumulation in emerging Asia: Is there evidence of fear of appreciation?," Economics Letters, Elsevier, vol. 111(3), pages 252-255, June.
    16. Heng, Dyna & Corbett, Jenny, 2011. "What Drives Some Countries to Hoard Foreign Reserves?," MPRA Paper 48552, University Library of Munich, Germany, revised Oct 2011.
    17. Fabio Milani, 2006. "The Evolution of the Fed's Inflation Target in an Estimated Model under RE and Learning," Working Papers 060704, University of California-Irvine, Department of Economics.
    18. Efrem Castelnuovo, 2004. "Describing the Fed's conduct with simple Taylor rules: is interest rate smoothing important?," Money Macro and Finance (MMF) Research Group Conference 2003 12, Money Macro and Finance Research Group.
    19. Surico, Paolo, 2003. "Measuring the time-inconsistency of US monetary policy," Working Paper Series 291, European Central Bank.
    20. Sachsida, Adolfo & Divino, Jose Angelo & Cajueiro, Daniel Oliveira, 2011. "Inflation, unemployment, and the time consistency of the US monetary policy," Structural Change and Economic Dynamics, Elsevier, vol. 22(2), pages 173-179, June.
    21. repec:pid:journl:v:56:y:2017:i:1:p:31-58 is not listed on IDEAS
    22. Selgin, George & Lastrapes, William D. & White, Lawrence H., 2012. "Has the Fed been a failure?," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 569-596.
    23. Heng, Dyna, 2011. "Does financial development reduce the motivation to hoard foreign reserves?," MPRA Paper 48555, University Library of Munich, Germany, revised 2012.
    24. Paolo Surico, 2004. "Inflation Targeting and Nonlinear Policy Rules: The Case of Asymmetric Preferences (new title: The Fed's monetary policy rule and U.S. inflation: The case of asymmetric preferences)," CESifo Working Paper Series 1280, CESifo Group Munich.
    25. Hayat, Zafar & Balli, Faruk & Rehman, Muhammad, 2017. "The relevance and relative robustness of sources of inflation bias in Pakistan," Economic Modelling, Elsevier, vol. 63(C), pages 283-303.

    More about this item

    Keywords

    asymmetric preferences; time-inconsistency; average inflation bias; US inflation;

    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

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