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Discussion Paper Details

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Title: Delegating Optimal Monetary Policy Inertia

Author(s): Florin Ovidiu Bilbiie

Publication Date: October 2009

Keyword(s): inflation, output gap growth and nominal income growth targeting., discretion and commitment, inertia, optimal delegation, stabilization bias, time inconsistency and timeless-optimal policy

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Bilbiie, F. 2009. 'Delegating Optimal Monetary Policy Inertia'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7482