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Testing for optimal monetary policy via moment inequalities

  • Coroneo, Laura

    (University of Manchester, Economics - School of Social Sciences)

  • Corradi, Valentina

    (University of Warwick, Department of Economics)

  • Santos Monteiro, Paulo

    (University of Warwick, Department of Economics)

The specification of an optimizing model of the monetary transmission mechanism requires selecting a policy regime, commonly commitment or discretion. In this paper we propose a new procedure for testing optimal monetary policy, relying on moment inequalities that nest commitment and discretion as two special cases. The approach is based on the derivation of bounds for inflation that are consistent with optimal policy under either policy regime. We derive testable implications that allow for specification tests and discrimination between the two alternative regimes. The proposed procedure is implemented to examine the conduct of monetary policy in the United States economy. Key words: Bootstrap ; GMM ; Moment Inequalities ; Optimal Monetary Policy. JEL Classification: C12 ; C52 ; E52 ; E58

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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 985.

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Date of creation: 2012
Date of revision:
Handle: RePEc:wrk:warwec:985
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