Whose monetary policy is it anyway?

The rising inflation of the 1970s inspired substantial theoretical analysis of the goals of central banks. In models with time-inconsistent monetary p olicy, central bankers are assumed to produce positive equilibrium inflatio n because they target an unemployment rate below the NAIRU. Ball (1995) not es that these models could explain the level of inflation but not its frequ ent and persistent movements. Although real shocks, as in Rogoff (1985), ca n produce temporary changes in inflation, Ball explains the recurrent and p ersistent movements in inflation throughout the past 40 years with random c hanges in the preferences of the monetary policymakers, occurring even at t he frequency of FOMC meetings. This paper provides empirical support that s hifts in goals can indeed occur at this frequency. However, it is not neces sarily the tastes of the policymakers that are changing; the FOMC's reading of the policy desired by the public can evolve over time, and if the FOMC is not completely goal-independent, it will accommodate these changes. (C) 1999 Elsevier Science B.V. All rights reserved. JEL classification: E52; E5 8.