Optimal choice of monetary policy instruments when policymaking is costly |
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Authors: | David D Vanhoose |
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Institution: | (1) University of Alabama, USA |
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Abstract: | Poole's analysis of the optimal choice of monetary policy instruments assumes that stochastic disturbances are temporary, that a monetary authority determines instrument settings each period, and that policymaking is a costless activity. This paper considers an environment in which shocks are cumulative, the monetary authority precommits to instrument settings for an interval of its own choosing, and the authority incurs costs when it adjusts its instrument settings. The key result that arises in this framework is that costs of policymaking generally induce a monetary authority either to choose a socially suboptimal policy instrument or to adjust its policy instrument settings over time in a manner that appears to be inefficient. |
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