DP2074 Should Monetary Policy be Adjusted Frequently?

Author(s): Sylvester C W Eijffinger, Harry Huizinga
Publication Date: February 1999
Keyword(s): Inflation, monetary policy frequency
JEL(s): D78, E58
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2074

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.