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Testing for optimal monetary policy via moment inequalities

Laura Coroneo (), Valentina Corradi and Paulo Santos Monteiro ()

Journal of Applied Econometrics, 2018, vol. 33, issue 6, 780-796

Abstract: 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 US economy.

Date: 2018
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https://doi.org/10.1002/jae.2629

Related works:
Working Paper: Testing for optimal monetary policy via moment inequalities (2013) Downloads
Working Paper: Testing for optimal monetary policy via moment inequalities (2012) Downloads
Working Paper: Testing for optimal monetary policy via moment inequalities (2012) Downloads
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