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Implementing optimal monetary policy: Objectives and rules

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  • Yuan, Huiping
  • Miller, Stephen M.

Abstract

The inconsistency of optimal policy comes from inconsistency between the social loss function and the economic structure. Accordingly, this paper designs a central bank loss function, which proves consistent with the economic structure. Under the designed central bank loss function discretionary policy proves optimal for social welfare. Optimal discretionary policy emerges because the implied behavioral equation is identical with that under commitment to the social loss function. Consequently, this paper also designs policy rules. To some extent, policy rules appear more basic, flexible, and operational than social and central bank loss functions, but the social loss function serves as an ultimate objective and the central bank loss function explicitly identifies the attainable targets and appropriate weight to achieve the social optimum.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 27 (2010)
Issue (Month): 3 (May)
Pages: 737-745

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Handle: RePEc:eee:ecmode:v:27:y:2010:i:3:p:737-745

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: Optimal policy Central bank loss functions Policy rules;

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References

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Cited by:
  1. Huiping Yuan & Stephen M. Miller, 2011. "The Optimality and Controllability of Discretionary Monetary Policy," Working papers 2011-17, University of Connecticut, Department of Economics.

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