Measuring the Time-Inconsistency of Us Monetary Policy

36 Pages Posted: 16 Apr 2004

See all articles by Paolo Surico

Paolo Surico

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

Multiple version iconThere are 2 versions of this paper

Date Written: November 2003

Abstract

This paper offers an alternative explanation for the behavior of postwar US inflation by measuring a novel source of monetary policy time-inconsistency due to Cukierman (2002). In the presence of asymmetric preferences, the monetary authorities end up generating a systematic inflation bias through the private sector expectations of a larger policy response in recessions than in booms. Reduced-form estimates of US monetary policy rules indicate that while the inflation target declines from the pre- to the post-Volcker regime, the average inflation bias, which is about one percent before 1979, tends to disappear over the last two decades. This result can be rationalized in terms of the preference on output stabilization, which is found to be large and asymmetric in the former but not in the latter period.

Keywords: Asymmetric preferences, time-inconsistency, average inflation bias, US inflation

JEL Classification: E52, E58

Suggested Citation

Surico, Paolo, Measuring the Time-Inconsistency of Us Monetary Policy (November 2003). ECB Working Paper No. 291. Available at SSRN: https://ssrn.com/abstract=487470

Paolo Surico (Contact Author)

London Business School - Department of Economics ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://sites.google.com/site/paolosurico

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

HOME PAGE: http://sites.google.com/site/paolosurico

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
122
Abstract Views
805
rank
225,282
PlumX Metrics