Testing for optimal monetary policy via moment inequalities

The specication 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 in ation that are consistent with optimal policy under either policy regime. We derive testable implications that allow for specication tests and discrimination between the two alternative regimes. The proposed procedure is implemented to examine the conduct of monetary policy in the United States economy.