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Testing for Optimal Monetary Policy via Moment Inequalities

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JournalJournal of Applied Econometrics
DateAccepted/In press - 28 Feb 2018
DateE-pub ahead of print (current) - 6 Jun 2018
Number of pages17
Early online date6/06/18
Original languageEnglish

Abstract

The specification of an optimizing model of the monetary transmission mechanism requires selecting a policy regime, commonly commitment or discretion. In this paper we propose a new procedure for testing optimal monetary policy, relying on moment inequalities that nest commitment and discretion as two special cases. The approach is based on the derivation of bounds for inflation that are consistent with optimal policy under either policy regime. We derive testable implications that allow for specification tests and discrimination between the two alternative regimes. The proposed procedure is implemented to examine the conduct of monetary policy in the United States economy.

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© 2018 John Wiley & Sons, Ltd. This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy. Further copying may not be permitted; contact the publisher for details

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