Commitment Issues: Does the Fed Have an Inflation Incentive to Commit?

• DOI: 10.1515/snde-2022-0034
• Publication Date: 2023-11-27T09:42:44Z
• Authors: C. Patrick Scott
• Keywords: 8. Economic growth; 0502 economics and business; 05 social sciences; 1. No poverty

Abstract Long-run results indicate that for price and wage inflation there is little disincentive for discretionary policy when monetary policy is at or near the zero-lower bound. Optimal commitment and discretionary policy are examined in a popular DSGE framework. The monetary authority targets a convex combination of price and wage inflationary gaps around time-varying inflation targets. A joint hypothesis test is derived to determine if the central bank faces an inflationary disincentive for activist policy. Considering price and wage inflation separately, there are significant short-run disincentives to discretionary policy. Discretion and commitment policies are not different for price and wage inflation when nominal interest rates are persistently low.