Estimating Central Bank Preferences Under Commitment and Discretion

Givens, Gregory Erin

doi:10.2139/ssrn.2927093

Cited by 10 publications

(11 citation statements)

References 67 publications

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“…This can capture the fact that the conservatism of the central bank may differ from that of the representative household. We also, in common with much of the literature (see, for example, Dennis (2004), Adolfson, Laseen, Linde, andSvensson (2011), Ilbas (2010) , Debertoli and Nunes (2010), Givens (2012) and Le…”

Section: Objective Functionmentioning

confidence: 57%

An Empirical Assessment of Optimal Monetary Policy Delegation in the Euro Area

2014

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We estimate a New Keynesian DSGE model for the Euro area under alternative descriptions of monetary policy (discretion, commitment or a simple rule) after allowing for Markov switching in policy maker preferences and shock volatilities. This reveals that there have been several changes in Euro area policy making, with a strengthening of the anti-inflation stance in the early years of the ERM, which was then lost around the time of German reunification and only recovered following the turnoil in the ERM in 1992. The ECB does not appear to have been as conservative as aggregate Euro-area policy was under Bundesbank leadership, and its response to the financial crisis has been muted. The estimates also suggest that the most appropriate description of policy is that of discretion, with no evidence of commitment in the Euro-area. As a result although both 'good luck' and 'good policy' played a role in the moderation of inflation and output volatility in the Euro-area, the welfare gains would have been substantially higher had policy makers been able to commit. We consider a range of delegation schemes as devices to improve upon the discretionary outcome, and conclude that price level targeting would have achieved welfare levels close to those attained under commitment, even after accounting for the existence of the Zero Lower Bound on nominal interest rates.

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Section: Objective Functionmentioning

confidence: 57%

An Empirical Assessment of Optimal Monetary Policy Delegation in the Euro Area

2014

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“…As with these studies (i.e. Givens, 2012;Le Roux and Kirsanova, 2013), we performed an empirical estimation based on optimal policies derived under either full commitment or discretion, but we also considered the intermediate case of quasi-commitment. To compute optimal policies, we recast the set of log-linearized equations in (4)-(11) the following state-space form…”

Section: Optimal Monetary Policymentioning

confidence: 99%

“…It is notable that these papers only consider one form of optimal policy. Papers which do consider both discretion and commitment include Givens (2012) for the US and Le Roux and Kirsanova (2013) for the UK.…”

Section: Estimating Dsge Models With Optimal Monetary Policymentioning

confidence: 99%

How optimal is US monetary policy?

Chen

Kirsanova

Leith

2017

Journal of Monetary Economics

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Most of the literature estimating DSGE models for monetary policy analysis assume that policy follows a simple rule. In this paper we allow policy to be described by various forms of optimal policy -commitment, discretion and quasi-commitment. We find that, even after allowing for Markov switching in shock variances, the inflation target and/or rule parameters, the data preferred description of policy is that the US Fed operates under discretion with a marked increase in conservatism after the 1970s. Parameter estimates are similar to those obtained under simple rules, except that the degree of habits is significantly lower and the prevalence of cost-push shocks greater. Moreover, we find that the greatest welfare gains from the 'Great Moderation' arose from the reduction in the variances in shocks hitting the economy, rather than increased inflation aversion. However, much of the high inflation of the 1970s could have been avoided had policy makers been able to commit, even without adopting stronger anti-inflation objectives. More recently the Fed appears to have temporarily relaxed policy following the 1987 stock market crash, and has lost, without regaining, its post-Volcker conservatism following the bursting of the dot-com bubble in 2000.

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“…While there are likely to be a myriad of factors behind this gradual adjustment in the policy rate, some empirical evidence suggests that such observed inertia in the policy rate reflects the central bank's deliberate desire to smooth the interest-rate path, in addition to what the intrinsic inertia in economic conditions calls for (Coibion and Gorodnichenko (2012); Givens (2012)). As reviewed below, several theoretical studies suggest that such desire by central banks for interest-rate smoothing can improve welfare in various environments.…”

Section: Introductionmentioning

confidence: 99%

Gradualism and Liquidity Traps

Nakata

Schmidt

2016

FEDS

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractModifying the mandate of a discretionary central bank to include an interest-rate smoothing objective increases the welfare of an economy where large contractionary shocks occasionally force the central bank to lower the policy rate to its effective lower bound. The central bank with an interest-rate smoothing objective credibly keeps the policy rate low for longer than the central bank with the standard mandate does. Through expectations, the temporary overheating of the economy associated with such low-for-long interest rate policy mitigates the declines in inflation and output when the lower bound constraint is binding. In a calibrated model, we find that the introduction of an interest-rate smoothing objective can reduce the welfare costs associated with the lower bound constraint by more than half.

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Estimating Central Bank Preferences Under Commitment and Discretion

Cited by 10 publications

References 67 publications

An Empirical Assessment of Optimal Monetary Policy Delegation in the Euro Area

An Empirical Assessment of Optimal Monetary Policy Delegation in the Euro Area

How optimal is US monetary policy?

Gradualism and Liquidity Traps

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