Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2013:8: Monetary Policy Under Discretion Or Commitment? -An Empirical Study

Pia Fromlet ()
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Pia Fromlet: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: In this paper, I investigate the monetary policy of five industrialized countries which have had explicit inflation targets for more than 15 years. Considering the case of discretionary policy as well as commitment, I estimate two first order conditions. The results support the theory of flexible in‡ation targeting under discretion for the United Kingdom. For New Zealand, the results under discretion suggests that monetary policymakers have been leaning with the wind rather than against the wind. The central banks of Canada, Sweden, and Australia have behaved in line with the theory of flexible in‡ation targeting under commitment.

Keywords: Inflation targeting; optimal policy under discretion; optimal policy under commitment

JEL-codes: E31; E52; E58; E61

57 pages, April 26, 2013

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