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Inflation and the Timing of Actions With Discretionary Monetary Policy, No. 25-40

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Inflation and the Timing of Actions With Discretionary Monetary Policy, No. 25-40

DATE: October 2025

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The optimal (or equilibrium) inflation rate is one of the most important and most studied ideas in monetary economics. Dating back to the influential 1977 paper "Rules Rather Than Discretion: The Inconsistency of Optimal Plans" by Finn Kydland and Edward Prescott, economists have understood that a central bank's ability to commit to future policies can affect the long-run optimal inflation rate. When the central bank can commit, the long-run inflation rate can be thought of as something the central bank can choose and achieve. In contrast, when the central bank cannot commit — that is, when its promises lack credibility — the long-run inflation rate is an equilibrium outcome of the interaction between the central bank and private agents.

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Van Zandweghe, Willem and Wolman, Alexander L. "Inflation and the Timing of Actions With Discretionary Monetary Policy, No. 25-40," Economic Brief (October 2025). https://fraser.stlouisfed.org/title/6034/item/707808, accessed on December 14, 2025.

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