Working Paper: CEPR ID: DP3370
Authors: Kosuke Aoki
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
JEL Codes: E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Commitment regime (D70) | Improved policy outcomes (D78) |
| Measurement errors (C20) | Initial policy decision (D78) |
| Initial policy decision (D78) | Future policy adjustments (E63) |
| Measurement errors (C20) | Fluctuations in key economic indicators (E32) |
| Commitment regime (D70) | Fluctuations in key economic indicators (E32) |
| Commitment regime (D70) | Economic stability (E60) |