Working Paper: CEPR ID: DP2074
Authors: Harry Huizinga; Sylvester Eijffinger
Abstract: This paper considers the optimal frequency of central bank decision making. This frequency affects the central bank?s flexibility to respond to economic shocks in a timely fashion, and also its credibility to maintain low inflation. Generally, the central bank resets monetary policy less often than the arrival of economic news. By adjusting monetary policy less frequently, the central bank achieves lower inflation at the cost of somewhat higher output variability. Evidence for several key countries (Australia, Germany, Japan, the United Kingdom and the United States) shows that the frequency of actual monetary policy changes is indeed positively related to the inflation rate.
Keywords: monetary policy; frequency; inflation
JEL Codes: D78; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| central bank's decision-making frequency (n) (E58) | inflation (E31) |
| central bank's decision-making frequency (n) (E58) | output shocks (E39) |
| output shock variability (E39) | optimal frequency of monetary policy adjustments (E63) |
| central bank's discount rate (E52) | optimal frequency of monetary policy adjustments (E63) |
| responsiveness of output to inflation (E31) | optimal frequency of monetary policy adjustments (E63) |
| frequency of monetary policy adjustments (E52) | inflation rates (E31) |
| lower frequency of monetary policy adjustments (E52) | lower average inflation (E31) |
| lower frequency of monetary policy adjustments (E52) | lower variability of inflation (E31) |
| higher frequency of monetary policy adjustments (E52) | higher average inflation (E31) |
| higher frequency of monetary policy adjustments (E52) | higher variability of inflation (E31) |