Measuring the Time-Inconsistency of Us Monetary Policy

Abstract

This paper offers an alternative explanation for the behaviour of post-war US inflation by measuring a novel source of monetary policy time-inconsistency due to Cukierman (2002). In the presence of asymmetric preferences, the monetary authorities end up generating a systematic inflation bias through the private sector expectations of a larger policy response in recessions than in booms. Reduced-form estimates of US monetary policy rules indicate that while the inflation target declines from the pre-to the post-Volcker regime, the average inflation bias, which is about one per cent before 1979, tends to disappear over the last two decades. This result can be rationalized in terms of the preference on output stabilisation, which is found to be large and asymmetric in the former but not in the latter period. JEL Classification: E52, E58