Delegating Optimal Monetary Policy Inertia

Florin Bilbiie

No 7482, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper shows that absent a commitment technology, central banks can nevertheless achieve the (timeless-)optimal commitment equilibrium if they are delegated with an objective function that is different from the societal one. In a prototypical forward-looking New Keynesian model, I develop a general linear-quadratic method to solve for the optimal delegation parameters that generate the optimal amount of inertia in a Markov-perfect equilibrium. I study the optimal design of some policy regimes that are nested within this framework: inflation, output-gap growth and nominal income growth targeting; and inflation and output-gap contracts. Notably, since the timeless-optimal equilibrium is time-consistent, so is any delegation scheme that implements it.

Keywords: Discretion and commitment; Inertia; Stabilization bias; Optimal delegation; Time inconsistency; inflation; output gap growth and nominal income growth targeting.; Timeless-optimal policy (search for similar items in EconPapers)
JEL-codes: C61 C73 E31 E52 E61 (search for similar items in EconPapers)
Date: 2009-10
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Related works:
Journal Article: Delegating optimal monetary policy inertia (2014)
Working Paper: Delegating optimal monetary policy inertia (2014)
Working Paper: Delegating optimal monetary policy inertia (2014)
Working Paper: Delegating optimal monetary policy inertia (2014)
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