Testing for optimal monetary policy via moment inequalities

Abstract

Summary The specification of an optimizing model of the monetary transmission mechanism requires selecting a policy regime: commonly, commitment or discretion. In this paper we propose a new procedure for testing optimal monetary policy, relying on moment inequalities that nest commitment and discretion as two special cases. The approach is based on the derivation of bounds for inflation that are consistent with optimal policy under either policy regime. We derive testable implications that allow for specification tests and discrimination between the two alternative regimes. The proposed procedure is implemented to examine the conduct of monetary policy in the US economy.

Robust forecast superiority testing with an application to assessing pools of expert forecasters

“…This is accomplished under a recursive estimation scheme, by extending the recursive block bootstrap introduced in Corradi and Swanson (2007). For the case of fixed estimation scheme, generalized moment selection (GMS) tests in the presence of nonvanishing estimation error have been considered in Coroneo et al (2018).…”

“…This is accomplished under a recursive estimation scheme, by extending the recursive block bootstrap introduced in Corradi and Swanson (2007). For the case of fixed estimation scheme, generalized moment selection (GMS) tests in the presence of nonvanishing estimation error have been considered in Coroneo et al (2018). Linton et al (2010) also develop tests for stochastic dominance which are correctly asymptotically sized over the boundary of the null, for the pairwise comparison case.…”