On the Timing of Monetary Policy Reform

37 Pages Posted: 8 Feb 2013

See all articles by Roc Armenter

Roc Armenter

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Date Written: December 26, 2012

Abstract

This paper argues that there is a normative case for delaying policy reform. Policy design in dynamic economies typically faces a trade-off between the policy effects in the short and long term, and possibly across future states of nature. When the economy is in an atypical state or available policies are less flexible than ideal, this trade-off can be steep enough that retaining the status-quo policy in the short term and taking on the reform at a later date is welfare improving. In a simple New Keynesian economy, I consider monetary policy reform from discretion to the optimal targeting rule. I find that the policy reform should be postponed if a sharp drop in output drives the nominal interest rate to the zero lower bound but only modest deflation pressures are observed under the status-quo policy.

Keywords: Monetary Policy, New Keynesian Economy

Suggested Citation

Armenter, Roc, On the Timing of Monetary Policy Reform (December 26, 2012). FRB of Philadelphia Working Paper No. 13-4. Available at SSRN: https://ssrn.com/abstract=2205377 or http://dx.doi.org/10.2139/ssrn.2205377

Roc Armenter (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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