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Author:Athey, Susan 

Conference Paper
The optimal degree of monetary policy discretion
AUTHORS: Atkeson, Andrew; Kehoe, Patrick J.; Athey, Susan
DATE: 2003

Working Paper
The optimal degree of discretion in monetary policy
How much discretion should the monetary authority have in setting its policy? This question is analyzed in an economy with an agreed-upon social welfare function that depends on the randomly fluctuating state of the economy. The monetary authority has private information about that state. In the model, well-designed rules trade off society's desire to give the monetary authority discretion to react to its private information against society's need to guard against the time inconsistency problem arising from the temptation to stimulate the economy with unexpected inflation. Although this dynamic mechanism design problem seems complex, society can implement the optimal policy simply by legislating an inflation cap that specifies the highest allowable inflation rate. The more severe the time inconsistency problem, the more tightly the cap constrains policy and the smaller is the degree of discretion. As this problem becomes sufficiently severe, the optimal degree of discretion is none.
AUTHORS: Athey, Susan; Atkeson, Andrew; Kehoe, Patrick J.
DATE: 2004

Working Paper
The optimal degree of discretion in monetary policy
How much discretion is it optimal to give the monetary authority in setting its policy? We analyze this mechanism design question in an economy with an agreed-upon social welfare function that depends on the randomly fluctuating state of the economy. The monetary authority has private information about that state. In the model, well-designed rules trade off society's desire to give the monetary authority flexibility to react to its private information against society's need to guard against the standard time inconsistency problem arising from the temptation to stimulate the economy with unexpected inflation. We find that the optimal degree of monetary policy discretion is decreasing in the severity of the time inconsistency problem. As this problem becomes sufficiently severe, the optimal degree of discretion is none at all. We also find that, despite the apparent complexity of this dynamic mechanism design problem, society can implement the optimal policy simply by legislating an inflation cap that specifies the highest allowable inflation rate. (Replaced by Staff Report No: 326)
AUTHORS: Kehoe, Patrick J.; Athey, Susan; Atkeson, Andrew
DATE: 2002

Report
The optimal degree of discretion in monetary policy
How much discretion should the monetary authority have in setting its policy? This question is analyzed in an economy with an agreed-upon social welfare function that depends on the randomly fluctuating state of the economy. The monetary authority has private information about that state. In the model, well-designed rules trade off society?s desire to give the monetary authority discretion to react to its private information against society?s need to guard against the time inconsistency problem arising from the temptation to stimulate the economy with unexpected inflation. Although this dynamic mechanism design problem seems complex, society can implement the optimal policy simply by legislating an inflation cap that specifies the highest allowable inflation rate. The more severe the time inconsistency problem and the less important is private information, the smaller is the optimal degree of discretion. As either the time inconsistency problem becomes sufficiently severe or private information becomes sufficiently unimportant, the optimal degree of discretion is none.
AUTHORS: Atkeson, Andrew; Athey, Susan; Kehoe, Patrick J.
DATE: 2004

Working Paper
On the optimality of transparent monetary policy
We analyze the optimal design of monetary rules. We suppose there is an agreed upon social welfare function that depends on the randomly fluctuating state of the economy and that the monetary authority has private information about that state. We suppose the government can constrain the policies of the monetary authority by legislating a rule. In general, well-designed rules trade-off the need to constrain policymakers from the standard time consistency problem arising from the temptation for unexpected inflation with the desire to give them flexibility to react to their private information. Surprisingly, we show that for a wide variety of circumstances the optimal rule gives the monetary authority no flexibility. This rule can be interpreted as a strict inflation targeting rule where the target is a prespecified function of publicly observed data. In this sense, optimal monetary policy is transparent.
AUTHORS: Kehoe, Patrick J.; Athey, Susan; Atkeson, Andrew
DATE: 2001

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