Measuring the Time Inconsistency of US Monetary Policy

17 Pages Posted: 29 Dec 2007

See all articles by Paolo Surico

Paolo Surico

London Business School - Department of Economics; Centre for Economic Policy Research (CEPR)

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Abstract

This paper offers an alternative explanation for the great inflation of the 1970s by measuring a novel source of monetary policy time inconsistency. In the presence of asymmetric preferences, the monetary authorities generate a systematic inflation bias through the private-sector expectations of a larger policy response in recessions than in booms. The estimated Fed's implicit target for inflation has declined from the pre to the post-Volcker regime. The average inflation bias was about 1% before 1979, but this has disappeared over the last two decades, because the preferences on output stabilization were large and asymmetric only in the former period.

Suggested Citation

Surico, Paolo, Measuring the Time Inconsistency of US Monetary Policy. Economica, Vol. 75, Issue 297, pp. 22-38, February 2008. Available at SSRN: https://ssrn.com/abstract=1079160 or http://dx.doi.org/10.1111/j.1468-0335.2007.00590.x

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Centre for Economic Policy Research (CEPR) ( email )

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