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Measuring the time inconsistency of U.S. monetary policy

Journal

Economica

Subject

Economics

Publishing details

Economica 2008 Vol 75:297 p 22-38

Authors / Editors

Surico P

Biographies

Paolo Surico

Publication Year

2008

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.

Available on ECCH

No


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