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Optimal Commitment Policy Under Noisy Information

Kosuke Aoki

No 3370, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper studies an advantage of commitment over discretion when a central bank observes only noisy measures of current inflation and output, in the context of an optimizing model with nominal-price stickiness. Under a commitment regime, if current policy turns out to be too expansionary (contractionary) because of the bank’s information problem, subsequent policies should be slightly contractionary (expansionary). By following this approach, the central bank can improve the trade-off between the fluctuations of its goal variables caused by economic shocks and those fluctuations caused by the bank’s response to measurement error.

Keywords: commitment; noisy information; optimal monetary policy (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2002-05
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Journal Article: Optimal commitment policy under noisy information (2006) Downloads
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