Using Empirically Estimated Efficiency Frontiers to Gauge Central  Bank Performance and Effectiveness

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Abstract/Contents

Abstract: The tradeoff efficiency frontier between the variability of inflation and the variability of output has served as an important tool for evaluating monetary policy, used recently by Mervyn King (2012), the Governor of the Bank of England, and Ben Bernanke (2004), the Chairman of the Federal Reserve. However, these previous studies focus on the theoretical versions of the tradeoff curve, whereas this paper, by using dynamic stochastic optimal control methods, empirically estimates and calculates the optimal tradeoff curves between output and inflation for the three key periods of 1983-1990,1991-2000, and 2001-2010. In the findings, an inward shift in efficiency frontiers is observed between the periods of 1983-1990 and 1991-2000, pointing to increased output and inflation stability; this macro improvement is unfortunately reversed in the 2000’s, shown by a drastic outward shift in efficiency frontiers between the periods of 1991-2000 and 2001-2010. Upon further examination, this outward shift can be attributed to more intense shocks, specifically the interest rate shocks caused by discretionary monetary policy and compromised central bank independence. Indeed, though the de jure independence of the central bank has stayed constant over time, discretionary policy making had led to a deterioration of de facto independence in the 2000’s, explaining the higher output and inflation variabilities as illustrated by the outward shift in optimal tradeoff curves.

Type of resource	text
Date created	May 2013

Author	Liu, Cynthia
Primary advisor	Taylor, John
Degree granting institution	Stanford University, Department of Economics

Subject	Stanford Department of Economics
Subject	inflation
Subject	output
Subject	monetary policy
Subject	tradeoff efficiency frontier
Genre	Thesis

Related item	Title 2013 Firestone Medal for Excellence in Undergraduate Research
Location	https://purl.stanford.edu/wh694hf5784

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Preferred Citation: Liu, Cynthia. (2013). Using Empirically Estimated Efficiency Frontiers to Gauge Central Bank Performance and Effectiveness. Stanford Digital Repository. Available at: https://purl.stanford.edu/wh694hf5784

Stanford University, Department of Economics, Honors Theses

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