IDEAS home Printed from https://ideas.repec.org/p/hal/pseptp/hal-01162224.html
   My bibliography  Save this paper

Delegating optimal monetary policy inertia

Author

Listed:
  • Florin Bilbiie

    (CEPR - Center for Economic Policy Research, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

In a forward-looking business cycle model, central banks can achieve the (timeless)optimal commitment equilibrium even in the absence of a commitment technology, if they are delegated with an objective function that is different from the societal one. The paper develops a general linear-quadratic method to solve for the optimal delegation parameters that generate the optimal amount of inertia in a Markov-perfect equilibrium, and studies the optimal design of some policy regimes that are nested within this framework: the (squared) optimal targeting rule; inflation, output-gap growth and nominal income growth targeting; and inflation and output-gap contracts.

Suggested Citation

  • Florin Bilbiie, 2014. "Delegating optimal monetary policy inertia," PSE-Ecole d'économie de Paris (Postprint) hal-01162224, HAL.
    • Handle: RePEc:hal:pseptp:hal-01162224
    DOI: 10.1016/j.jedc.2014.08.019
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Carl Walsh, 2003. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 93(1), pages 265-278, March.
    2. Canzoneri, Matthew B, 1985. "Monetary Policy Games and the Role of Private Information," American Economic Review, American Economic Association, vol. 75(5), pages 1056-1070, December.
    3. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March.
    4. Robert E. Hall & N. Gregory Mankiw, 1994. "Nominal Income Targeting," NBER Chapters, in: Monetary Policy, pages 71-94, National Bureau of Economic Research, Inc.
    5. Bilbiie, Florin O., 2008. "Limited asset markets participation, monetary policy and (inverted) aggregate demand logic," Journal of Economic Theory, Elsevier, vol. 140(1), pages 162-196, May.
    6. Willem Van Zandweghe & Alexander L. Wolman, 2019. "Discretionary monetary policy in the Calvo model," Quantitative Economics, Econometric Society, vol. 10(1), pages 387-418, January.
    7. Taylor, John B, 1982. "Establishing Credibility: A Rational Expectations Viewpoint," American Economic Review, American Economic Association, vol. 72(2), pages 81-85, May.
    8. Benigno, Gianluca & Benigno, Pierpaolo, 2006. "Designing targeting rules for international monetary policy cooperation," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 473-506, April.
    9. Dennis, Richard, 2010. "When is discretion superior to timeless perspective policymaking?," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 266-277, April.
    10. Anderson, Gary S. & Kim, Jinill & Yun, Tack, 2010. "Using a projection method to analyze inflation bias in a micro-founded model," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1572-1581, September.
    11. Bennett T. McCallum & Edward Nelson, 2004. "Timeless perspective vs. discretionary monetary policy in forward-looking models," Review, Federal Reserve Bank of St. Louis, vol. 86(Mar), pages 43-56.
    12. Thompson, Earl A, 1981. "Who Should Control the Money Supply?," American Economic Review, American Economic Association, vol. 71(2), pages 356-361, May.
    13. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    14. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    15. Florin O. Bilbiie, 2011. "The Time Inconsistency of Delegation-Based Time Inconsistency Solutions in Monetary Policy," Journal of Optimization Theory and Applications, Springer, vol. 150(3), pages 657-674, September.
    16. Henrik Jensen, 2002. "Targeting Nominal Income Growth or Inflation?," American Economic Review, American Economic Association, vol. 92(4), pages 928-956, September.
    17. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    18. Michael Woodford, 2000. "Pitfalls of Forward-Looking Monetary Policy," American Economic Review, American Economic Association, vol. 90(2), pages 100-104, May.
    19. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 53-84, December.
    20. Backus, David & Driffill, John, 1985. "Inflation and Reputation," American Economic Review, American Economic Association, vol. 75(3), pages 530-538, June.
    21. Benigno, Gianluca & Benigno, Pierpaolo, 2008. "Implementing International Monetary Cooperation Through Inflation Targeting," Macroeconomic Dynamics, Cambridge University Press, vol. 12(S1), pages 45-59, April.
    22. Michael Woodford, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(s1), pages 1-35.
    23. Lockwood, Ben, 1997. "State-Contingent Inflation Contracts and Unemployment Persistence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 286-299, August.
    24. Ben Lockwood & Marcus Miller & Lei Zhang, 1998. "Designing Monetary Policy when Unemployment Persists," Economica, London School of Economics and Political Science, vol. 65(259), pages 327-345, August.
    25. 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.
    26. Vestin, David, 2006. "Price-level versus inflation targeting," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1361-1376, October.
    27. 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 473-491, June.
    28. Gianluca Benigno & Pierpaolo Benigno, 2004. "Designing Target Rules for International Monetary Policy Cooperation," CEP Discussion Papers dp0666, Centre for Economic Performance, LSE.
    29. Jensen, Henrik, 1997. "Credibility of Optimal Monetary Delegation," American Economic Review, American Economic Association, vol. 87(5), pages 911-920, December.
    30. Niemann, S & Pichler, P & Sorger, G, 2009. "Inflation dynamics under optimal discretionary fiscal and monetary policies," Economics Discussion Papers 2898, University of Essex, Department of Economics.
    31. McCallum, Bennett T, 1995. "Two Fallacies Concerning Central-Bank Independence," American Economic Review, American Economic Association, vol. 85(2), pages 207-211, May.
    32. Henrik Jensen & Roel M. W. J. Beetsma, 1999. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts: Comment," American Economic Review, American Economic Association, vol. 89(1), pages 342-347, March.
    33. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    34. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(4), pages 1169-1189.
    35. repec:bla:manchs:v:67:y:1999:i:0:p:1-35 is not listed on IDEAS
    36. repec:bla:econom:v:65:y:1998:i:259:p:327-45 is not listed on IDEAS
    37. Michael Woodford, 2003. "Optimal Interest-Rate Smoothing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(4), pages 861-886.
    38. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-167, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ida, Daisuke, 2020. "Sectoral inflation persistence and optimal monetary policy," Journal of Macroeconomics, Elsevier, vol. 65(C).
    2. Taisuke Nakata & Sebastian Schmidt, 2019. "Gradualism and Liquidity Traps," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 182-199, January.
    3. Kohei Hasui & Teruyoshi Kobayashi & Tomohiro Sugo, 2019. "Irreversible monetary policy at the zero lower bound," Discussion Papers 1906, Graduate School of Economics, Kobe University.
    4. Taisuke Nakata & Sebastian Schmidt & Paul Yoo, 2018. "Speed Limit Policy and Liquidity Traps," IMES Discussion Paper Series 18-E-06, Institute for Monetary and Economic Studies, Bank of Japan.
    5. Marest, Luc & Thurston, Thom, 2018. "Measuring the value of central bank commitment in the benchmark New Keynesian model," Journal of Macroeconomics, Elsevier, vol. 58(C), pages 249-265.
    6. Taisuke Nakata & Sebastian Schmidt, 2019. "Gradualism and Liquidity Traps," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 182-199, January.
    7. Kohei Hasui, 2021. "How robustness can change the desirability of speed limit policy," Scottish Journal of Political Economy, Scottish Economic Society, vol. 68(5), pages 553-570, November.
    8. Hasui, Kohei & Kobayashi, Teruyoshi & Sugo, Tomohiro, 2021. "Optimal irreversible monetary policy," European Economic Review, Elsevier, vol. 134(C).
    9. Ida, Daisuke, 2023. "Liquidity-constrained consumers and optimal monetary policy in a currency union," Journal of International Money and Finance, Elsevier, vol. 131(C).
    10. Florin O. Bilbiie, 2019. "Optimal Forward Guidance," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(4), pages 310-345, October.
    11. Martin Bodenstein & Junzhu Zhao, 2019. "On Targeting Frameworks And Optimal Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(8), pages 2077-2113, December.
    12. Ida, Daisuke & Okano, Mitsuhiro, 2023. "Optimal monetary policy delegation in a small-open new Keynesian model with robust control," Economic Modelling, Elsevier, vol. 120(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yuan, Huiping & Miller, Stephen M., 2010. "Implementing optimal monetary policy: Objectives and rules," Economic Modelling, Elsevier, vol. 27(3), pages 737-745, May.
    2. Carl E. Walsh, 2002. "When should central bankers be fired?," Economics of Governance, Springer, vol. 3(1), pages 1-21, March.
    3. Gersbach, Hans & Hahn, Volker, 2014. "Inflation forecast contracts," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 26-40.
    4. Florin Bilbiie, 2005. "Deus ex machina wanted: time inconsistency of time consistency solutions in monetary policy," Economics Papers 2005-W10, Economics Group, Nuffield College, University of Oxford.
    5. Richard Mash, 2000. "The Time Inconsistency of Monetary Policy with Inflation Persistence," Economics Series Working Papers 15, University of Oxford, Department of Economics.
    6. Huiping Yuan & Stephen M. Miller & Langnan Chen, 2011. "The Optimality And Controllability Of Monetary Policy Through Delegation With Consistent Targets," Scottish Journal of Political Economy, Scottish Economic Society, vol. 58(1), pages 82-106, February.
    7. Loisel, Olivier, 2008. "Central bank reputation in a forward-looking model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3718-3742, November.
    8. Florin O. Bilbiie, 2011. "The Time Inconsistency of Delegation-Based Time Inconsistency Solutions in Monetary Policy," Journal of Optimization Theory and Applications, Springer, vol. 150(3), pages 657-674, September.
    9. Henrik Jensen, 2002. "Targeting Nominal Income Growth or Inflation?," American Economic Review, American Economic Association, vol. 92(4), pages 928-956, September.
    10. Dennis, Richard & Soderstrom, Ulf, 2006. "How Important Is Precommitment for Monetary Policy?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 847-872, June.
    11. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
    12. Walsh, Carl E, 2003. "Accountability, Transparency, and Inflation Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(5), pages 829-849, October.
    13. Richard Mash, 2003. "New Keynesian Microfoundations Revisited: A Calvo-Taylor-Rule-of-Thumb Model and Optimal Monetary Policy Delegation," Economics Series Working Papers 174, University of Oxford, Department of Economics.
    14. Givens, Gregory E., 2009. "Which price level to target? Strategic delegation in a sticky price and wage economy," Journal of Macroeconomics, Elsevier, vol. 31(4), pages 685-698, December.
    15. Ulf Söderström, 2005. "Targeting Inflation with a Role for Money," Economica, London School of Economics and Political Science, vol. 72(288), pages 577-596, November.
    16. Nessen, Marianne & Vestin, David, 2005. "Average Inflation Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 837-863, October.
    17. Masciandaro, Donato, 2022. "Independence, conservatism, and beyond: Monetary policy, central bank governance and central banker preferences (1981–2021)," Journal of International Money and Finance, Elsevier, vol. 122(C).
    18. Francisco J. Ruge-Murciá, 2002. "A Prudent Central Banker," IMF Staff Papers, Palgrave Macmillan, vol. 49(3), pages 1-7.
    19. repec:bla:manchs:v:70:y:2002:i:0:p:55-86 is not listed on IDEAS
    20. Donato Masciandaro & Davide Romelli, 2019. "Behavioral Monetary Policymaking: Economics, Political Economy and Psychology," World Scientific Book Chapters, in: Behavioral Finance The Coming of Age, chapter 9, pages 285-329, World Scientific Publishing Co. Pte. Ltd..
    21. Carl Walsh, 2003. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 93(1), pages 265-278, March.

    More about this item

    Keywords

    discretion and commitment; inertia; optimal delegation; stabilization bias; timeless-optimal policy; inflation; output gap growth; nominal income growth targeting;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:pseptp:hal-01162224. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Caroline Bauer (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.