Optimal monetary policy rules in a rational expectations model of the Phillips curve
AbstractIn this paper we construct a rational expectations model based on a Phillips curve that embodies persistence in inflation. As we assume that the central bank targets the natural rate of output, there is no inflation bias. We derive optimal monetary policy rules that are state-contingent and shock-dependent both in the case where the central bank follows a commitment strategy and where it pursues a discretionary procedure. Numerical solutions show that in the state-contingent part there always exists a trade-off between these two optimal rules, in that the commitment rule involves smaller expected deviations of inflation from its target; in the shock-dependent part there can be situations in which the discretionary rule is more effective in reducing the impact of the random shock on inflation and less effective in reducing the random shock on output. Only in the latter case it is possible that one rule is superior; otherwise it is generally the case that a trade-off exists between these two rules.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Monetary Economics.
Volume (Year): 43 (1999)
Issue (Month): 2 (April)
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/505566
Other versions of this item:
- Haizhou Huang & Peter B Clark & Charles Goodhart, 1996. "Optimal Monetary Policy Rules in a Rational Expectations Model of the Phillips Curve," FMG Discussion Papers dp247, Financial Markets Group.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Svensson, Lars E O, 1995.
"Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts,"
CEPR Discussion Papers
1249, C.E.P.R. Discussion Papers.
- Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March.
- Svensson, L.E.O., 1995. "Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts," Papers 595, Stockholm - International Economic Studies.
- Lars E.O. Svensson, 1997. "Optimal Inflation Targets, `Conservative' Central Banks, and Linear Inflation Contracts," NBER Working Papers 5251, National Bureau of Economic Research, Inc.
- repec:fth:exetec:94-08 is not listed on IDEAS
- Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
- Lockwood, Ben & Philippopoulos, Apostolis, 1994. "Insider Power, Unemployment Dynamics and Multiple Inflation Equilibria," Economica, London School of Economics and Political Science, vol. 61(241), pages 59-77, February.
- Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
- Willem H. Buiter, 1981.
"The Superiority of Contingent Rules over Fixed Rules in Models with Rational Expectations,"
NBER Technical Working Papers
0009, National Bureau of Economic Research, Inc.
- Buiter, Willem H, 1981. "The Superiority of Contingent Rules over Fixed Rules in Models with Rational Expectations," Economic Journal, Royal Economic Society, vol. 91(363), pages 647-70, September.
- Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
- Taylor, John B, 1980.
"Aggregate Dynamics and Staggered Contracts,"
Journal of Political Economy,
University of Chicago Press, vol. 88(1), pages 1-23, February.
- Barro, Robert J. & Gordon, David B., 1983.
"Rules, discretion and reputation in a model of monetary policy,"
Journal of Monetary Economics,
Elsevier, vol. 12(1), pages 101-121.
- Robert J. Barro & David B. Gordon, 1984. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
- Lockwood, B. & Miller, M. & Zhang, L., 1994.
"Designing Monetary Policy when Unemployment Persists,"
9408, Exeter University, Department of Economics.
- Lockwood, Ben & Miller, Marcus & Zhang, Lei, 1998. "Designing Monetary Policy When Unemployment Persists," Economica, London School of Economics and Political Science, vol. 65(259), pages 327-45, August.
- Peter Clark & Douglas Laxton & David Rose, 1996. "Asymmetry in the U.S. Output-Inflation Nexus," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 216-251, March.
- Richard Clarida & Mark Gertler, 1996.
"How the Bundesbank Conducts Monetary Policy,"
NBER Working Papers
5581, National Bureau of Economic Research, Inc.
- Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
- Douglas Laxton & Guy Meredith & David Rose, 1995.
"Asymmetric Effects of Economic Activity on Inflation: Evidence and Policy Implications,"
IMF Staff Papers,
Palgrave Macmillan, vol. 42(2), pages 344-374, June.
- Douglas Laxton & Guy Meredith & David Rose, 1994. "Asymmetric Effects of Economic Activity on Inflation - Evidence and Policy Implications," IMF Working Papers 94/139, International Monetary Fund.
- Robert P. Flood & Peter Isard, 1989. "Monetary Policy Strategies," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 612-632, September.
- Charles Goodhart & Haizhou Huang, 1995. "What is the Central Banks Game?," FMG Discussion Papers dp222, Financial Markets Group.
- Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If references are entirely missing, you can add them using this form.