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Commitment Issues: Does the Fed Have an Inflation Incentive to Commit?

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  • Scott C. Patrick

    (Department of Economics & Finance, Louisiana Tech University, Ruston, USA)

Abstract

Long-run results indicate that for price and wage inflation there is little disincentive for discretionary policy when monetary policy is at or near the zero-lower bound. Optimal commitment and discretionary policy are examined in a popular DSGE framework. The monetary authority targets a convex combination of price and wage inflationary gaps around time-varying inflation targets. A joint hypothesis test is derived to determine if the central bank faces an inflationary disincentive for activist policy. Considering price and wage inflation separately, there are significant short-run disincentives to discretionary policy. Discretion and commitment policies are not different for price and wage inflation when nominal interest rates are persistently low.

Suggested Citation

  • Scott C. Patrick, 2024. "Commitment Issues: Does the Fed Have an Inflation Incentive to Commit?," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 28(5), pages 767-784.
    • Handle: RePEc:bpj:sndecm:v:28:y:2024:i:5:p:767-784:n:1004
    DOI: 10.1515/snde-2022-0034
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    More about this item

    Keywords

    optimal monetary policy; timeless perspective policy; discretionary policy; wage and price inflation; Bayesian inference;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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