Supply Shocks and Optimal Monetary Policy
AbstractThis paper demonstrates that if current shocks are observed instantaneously, output can be stabilized perfectly for completely general supply disturbances, using simple monetary rules based only on: (1) the current shock; (2) the previous forecast of the current shock; and (3) the forecast for just one period ahead. The optimal rule can be expressed in an infinite number of ways and various alternatives are considered. With optimal wage indexation, the monetary rule is even simpler. If current shocks are not observed instantaneously, but are inferred from other signals, the optimal rules are of the same form, with the current perceived disturbance replacing the actual. Copyright 1987 by Royal Economic Society.
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Bibliographic InfoArticle provided by Oxford University Press in its journal Oxford Economic Papers.
Volume (Year): 39 (1987)
Issue (Month): 1 (March)
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- Aizenman, Joshua & Frenkel, Jacob A, 1986.
"Supply Shocks, Wage Indexation and Monetary Accommodation,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 18(3), pages 304-22, August.
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- Aizenman, Joshua & Frenkel, Jacob A, 1985.
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American Economic Review,
American Economic Association, vol. 75(3), pages 402-23, June.
- Joshua Aizenman & Jacob A. Frenkel, 1985. "Optimal Wage Indexation, Foreign-Exchange Intervention and Monetary Policy," NBER Working Papers 1329, National Bureau of Economic Research, Inc.
- Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
- Blinder, Alan S, 1981.
"Monetary Accommodation of Supply Shocks under Rational Expectations,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 13(4), pages 425-38, November.
- Alan S. Blinder, 1981. "Monetary Accommodation of Supply Shocks under Rational Expectations," NBER Working Papers 0464, National Bureau of Economic Research, Inc.
- Robert J. Gordon, 1986.
"Supply Shocks and Monetary Policy Revisited,"
NBER Working Papers
1301, National Bureau of Economic Research, Inc.
- Robert J. Gordon, 1975. "Alternative Responses of Policy to External Supply Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(1), pages 183-206.
- Robert Rennhack, 1991. "La Conducción de la Política Monetaria," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 28(83), pages 11-20.
- Juan Carlos Castañeda & Carlos Eduardo Castillo, 2005. "Supply Shocks in the Transition Towards an Inflation Targeting Reform: an Empirical Evidence for Guatemala," Working Papers Central Bank of Chile 354, Central Bank of Chile.
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