DP3370 Optimal Commitment Policy Under Noisy Information

Author(s): Kosuke Aoki
Publication Date: May 2002
Keyword(s): commitment, noisy information, optimal monetary policy
JEL(s): E31, E52
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3370

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.