Estimating Central Bank Preferences under Commitment and Discretion |
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Authors: | GREGORY E GIVENS |
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Institution: | Gregory E. Givens is Assistant Professor of Economics, Department of Economics, Finance, and Legal Studies, Culverhouse College of Commerce, University of Alabama (E‐mail: gegivens@cba.ua.edu). |
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Abstract: | This paper explains U.S. macroeconomic outcomes with an empirical New Keynesian model in which monetary policy minimizes the central bank’s loss function. The presence of expectations in the model forms a well‐known distinction between two modes of optimization, termed commitment and discretion. The model is estimated separately under each policy using maximum likelihood over the Volcker–Greenspan–Bernanke period. Comparisons of fit reveal that the data favor the specification with discretionary policy. Estimates of the loss function weights point to an excessive concern for interest rate smoothing in the commitment model but a more balanced concern relative to inflation and output stability in the discretionary model. |
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Keywords: | C32 C61 E52 E58 E61 optimal monetary policy commitment discretion policy preferences |
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