Estimating Central Bank Preferences under Commitment and Discretion

Gregory Givens

No 200905, Working Papers from Middle Tennessee State University, Department of Economics and Finance

Abstract: This paper explains US macroeconomic outcomes with an empirical new-Keynesian model in which monetary policy minimizes the central bank's loss function. The presence of expectations in the model forms a well-known distinction between two modes of optimization, termed commitment and discretion. I estimate the model separately under each policy using maximum likelihood over the Volcker-Greenspan-Bernanke period. Comparisons of fit reveal that the data favor the specification with discretionary policy. Estimates of the loss function weights point to an excessive concern for interest rate smoothing in the commitment model but a more balanced concern relative to inflation and output stability in the discretionary model.

Keywords: Optimal Monetary Policy; Commitment; Discretion; Policy Preferences (search for similar items in EconPapers)
JEL-codes: C32 C61 E52 E58 E61 (search for similar items in EconPapers)
Date: 2009-06
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Estimating Central Bank Preferences under Commitment and Discretion (2012)
Journal Article: Estimating Central Bank Preferences under Commitment and Discretion (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:mts:wpaper:200905

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