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Supply Shocks and Optimal Monetary Policy

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  • Turnovsky, Stephen J

Abstract

This 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 Info

Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 39 (1987)
Issue (Month): 1 (March)
Pages: 20-37

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Handle: RePEc:oup:oxecpp:v:39:y:1987:i:1:p:20-37

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  1. Robert J. Gordon, 1986. "Supply Shocks and Monetary Policy Revisited," NBER Working Papers 1301, National Bureau of Economic Research, Inc.
  2. Aizenman, Joshua & Frenkel, Jacob A, 1985. "Optimal Wage Indexation, Foreign Exchange Intervention, and Monetary Policy," American Economic Review, American Economic Association, vol. 75(3), pages 402-23, June.
  3. Joshua Aizenman & Jacob A. Frenkel, 1985. "Supply Shocks, Wage Indexation and Monetary Accommodation," NBER Working Papers 1609, National Bureau of Economic Research, Inc.
  4. 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.
  5. 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.
  6. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
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Cited by:
  1. 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.
  2. 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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