The Gains from Delegation Revisited: Price-Level Targeting, Speed-Limit and Interest Rate Smoothing Policies

Blake, A.P., Kirsanova, T. and Yates, A. (2010) The Gains from Delegation Revisited: Price-Level Targeting, Speed-Limit and Interest Rate Smoothing Policies. Working Paper. Social Science Research Network. (doi: 10.2139/ssrn.1595714).

Abstract

This paper revisits the argument that a stabilisation bias that arises under discretionary monetary policy can be reduced if policy is delegated to a policymaker with distorted objectives. We study three delegation schemes: price level targeting, interest rate smoothing and speed-limit policy. These schemes are likely to increase social welfare in models with unique discretionary equilibrium. We investigate how these schemes perform on a standard New Keynesian model with capital accumulation, which is arguably more realistic than those models that were used to establish the theory, but lacks a unique equilibrium under discretion. We discuss how multiplicity arises and demonstrate that neither delegaction scheme is able to eliminate the bad equilibrium, and the price level targeting can create yet another equilibrium that is welfare dominated. As a move between Markov-perfect discretionary equilibria can be driven by an exogenous event, a change in policy objectives may lead to different outcomes than those the policymaker had hoped for.

• Item Type: Research Reports or Papers (Working Paper)
• Additional Information: Published online
• Keywords: Time consistency, discretion, multiple equilibria, policy delegation
• Status: Published
• Refereed: No
• Glasgow Author(s) Enlighten ID: Kirsanova, Professor Tatiana
• Authors: Blake, A.P., Kirsanova, T., and Yates, A.
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: SSRN eLibrary
• Publisher: Social Science Research Network