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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. Woodford, Michael, 1999. "Optimal monetary policy inertia," CFS Working Paper Series 1999/09, Center for Financial Studies (CFS).
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  13. 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.
  14. 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.
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  17. Richard Dennis, 2001. "The policy preferences of the U.S. Federal Reserve," Working Paper Series 2001-08, Federal Reserve Bank of San Francisco.
  18. A. Hakan Kara, 2003. "Optimal Monetary Policy, Commitment, and Imperfect Credibility," Working Papers 0301, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  19. 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.
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