Authors:

  • Adi Sunderam
  • Jeremy Stein

Excerpt

Gradualism in Monetary Policy: A Time-Consistency Problem? Jeremy C. Stein, Adi Sunderam, June 2015, Paper. "We develop a model of monetary policy with two key features: (i) the central bank has private information about its long-run target for the policy rate; and (ii) the central bank is averse to bond-market volatility. In this setting, discretionary monetary policy is gradualist, or inertial, in the sense that the central bank only adjusts the policy rate slowly in response to changes in its privately-observed target. Such gradualism reflects an attempt to not spook the bond market. However, this effort ends up being thwarted in equilibrium..."  Link