On the Timing of Monetary Policy Reform

When the economy is in an atypical state or available policies are less flexible than ideal, this trade-off can be steep enough that retaining the status-quo policy in the short term and taking on the reform at a later date is welfare improving. In a simple New Keynesian economy, the author considers monetary policy reform from discretion to the optimal targeting rule. The author finds that the policy reform should be postponed if a sharp drop in output drives the nominal interest rate to the zero lower bound but only modest deflation pressures are observed under the status-quo policy.