The Optimal Degree of Monetary-Discretion in a New Keynesian Model with Private Information

Yuichiro Waki, Richard Dennis and Ippei Fujiwara

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: This paper considers the optimal degree of discretion in monetary policy when the central bank conducts policy based on its private information about the state of the economy and is unable to commit. Society seeks to maximize social welfare by imposing restrictions on the central bank's actions over time, and the central bank takes these restrictions and the New Keynesian Phillips curve as constraints. By solving a dynamic mechanism design problem we find that it is optimal to grant "constrained discretion" to the central bank by imposing both upper and lower bounds on permissible inflation, and that these bounds must be set in a history-dependent way. The optimal degree of discretion varies over time with the severity of the time-inconsistency problem, and, although no discretion is optimal when the time-inconsistency problem is very severe, our numerical experiment suggests that no-discretion is a transient phenomenon, and that some discretion is granted eventually.

Pages: 55 pages
Date: 2015-01
New Economics Papers: this item is included in nep-cba and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://www.rieti.go.jp/jp/publications/dp/15e007.pdf (application/pdf)

Related works:
Journal Article: The optimal degree of monetary-discretion in a New Keynesian model with private information (2018)
Working Paper: The Optimal Degree of Monetary-Discretion in a New Keynesian Model with Private Information (2017)
Working Paper: The Optimal Degree of Monetary-Discretion in a New Keynesian Model with Private Information (2015)
Working Paper: The Optimal Degree of Monetary-Discretion in a New Keynesian Model with Private Information (2015)
Working Paper: The Optimal Degree of Monetary-Discretion in a New Keynesian Model with Private Information (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eti:dpaper:15007

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