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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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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
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