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Measuring the Time Inconsistency of US Monetary Policy
Author(s) -
SURICO PAOLO
Publication year - 2008
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/j.1468-0335.2007.00590.x
Subject(s) - economics , monetary policy , inflation (cosmology) , boom , monetary economics , recession , inflation targeting , dynamic inconsistency , keynesian economics , macroeconomics , microeconomics , engineering , physics , environmental engineering , theoretical physics
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.