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Limited Commitment, Inaction and Optimal Monetary Policy

  • Tokhir Mirzoev

    (Ohio State University)

This paper examines the optimal frequency of monetary policy meetings when their schedule is pre-announced. Our contribution is twofold. First, we show that in the standard New Keynesian framework infrequent but periodic revision of monetary policy may be desirable even when there are no explicit costs of policy adjustment. Adjustment of policy on a pre-announced schedule de facto acts as a commitment not to adjust in intermediate periods. We find that at short horizons gains from such commitment outweigh welfare costs of central bank's inaction. Second, we solve for the optimal frequency of policy adjustment and characterize its determinants. When applied to the U.S. economy, our analysis suggests that the Federal Open Markets Committee should revise the federal funds target rate no more than twice a year.

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File URL: http://econwpa.repec.org/eps/mac/papers/0409/0409027.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0409027.

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Length: 49 pages
Date of creation: 29 Sep 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0409027
Note: Type of Document - pdf; pages: 49
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Richard Dennis & Ulf Soderstrom, 2002. "How important is precommitment for monetary policy?," Working Paper Series 2002-10, Federal Reserve Bank of San Francisco.
  2. A. Hakan Kara, 2004. "Optimal Monetary Policy, Commitment, and Imperfect Credibility," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 4(1), pages 31-66.
  3. Domeij, David & Floden, Martin, 2001. "The labor-supply elasticity and borrowing constraints: Why estimates are biased," SSE/EFI Working Paper Series in Economics and Finance 480, Stockholm School of Economics.
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  5. Michael Woodford, 1999. "Optimal Monetary Policy Inertia," NBER Working Papers 7261, National Bureau of Economic Research, Inc.
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  8. Edward C. Prescott, 2004. "Why Do Americans Work So Much More Than Europeans?," Levine's Bibliography 122247000000000413, UCLA Department of Economics.
  9. Mark Toma, 2001. "Monetary policy," Chapters, in: The Elgar Companion to Public Choice, chapter 21 Edward Elgar Publishing.
  10. Jordi Gali & David López-Salido & Javier Valles, 2004. "Understanding the effects of government spending on consumption," International Finance Discussion Papers 805, Board of Governors of the Federal Reserve System (U.S.).
  11. Andrea Tambalotti & Ernst Schaumburg, 2004. "An Investigation of the Gains from Commitment in Monetary Policy," Econometric Society 2004 North American Summer Meetings 282, Econometric Society.
  12. Altonji, Joseph G, 1986. "Intertemporal Substitution in Labor Supply: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages S176-S215, June.
  13. Peter N. Ireland, 2002. "Technology Shocks in the New Keynesian Model," Boston College Working Papers in Economics 536, Boston College Department of Economics.
  14. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
  15. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Harvard Institute of Economic Research Working Papers 1922, Harvard - Institute of Economic Research.
  16. Rotemberg, Julio J & Woodford, Michael, 1992. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1153-1207, December.
  17. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  18. Paul Klein & JosÈ-VÌctor RÌos-Rull, 2003. "Time-consistent optimal fiscal policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1217-1245, November.
  19. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
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