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Active and Passive Monetary Policy in an Overlapping Generations Model

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Author Info
Gerhard Sorger (University of Vienna)

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Abstract

In a standard overlapping generations model, active monetary policy reinforces mechanisms that lead to equilibrium indeterminacy and to countercyclical behavior of young-age consumption. The policy rule which minimizes inflation volatility can be active or passive, depending on the characteristics of shocks and the risk aversion of households. Inflation forecast errors are always greater under active inflation forecast targeting than under passive inflation forecast targeting or strict money growth targeting. Indeterminacy is more likely under an active forwardlooking rule than under the corresponding backward-looking rule, but backward-looking rules can render the monetary steady state unstable. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2005.01.009
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Publisher Info
Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 8 (2005)
Issue (Month): 3 (July)
Pages: 731-748
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Handle: RePEc:red:issued:v:8:y:2005:i:3:p:731-748

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Related research
Keywords: Monetary policy rules; indeterminacy; business cycles;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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  3. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February. [Downloadable!] (restricted)
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    Other versions:
  5. Benhabib Jess & Rustichini Aldo, 1994. "Introduction to the Symposium on Growth, Fluctuations, and Sunspots: Confronting the Data," Journal of Economic Theory, Elsevier, vol. 63(1), pages 1-18, June. [Downloadable!] (restricted)
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  8. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June. [Downloadable!] (restricted)
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  9. Grandmont, Jean-Michel & Pintus, Patrick & de Vilder, Robin, 1998. "Capital-Labor Substitution and Competitive Nonlinear Endogenous Business Cycles," Journal of Economic Theory, Elsevier, vol. 80(1), pages 14-59, May. [Downloadable!] (restricted)
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  10. Timothy J Kehoe & David K Levine, 1985. "Comparative Statics and Perfect Foresight in Infinite Horizon Economies," Levine's Working Paper Archive 1873, UCLA Department of Economics. [Downloadable!]
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  11. Laitner, John, 1989. "Dynamic determinacy and the existence of sunspot equilibria," Journal of Economic Theory, Elsevier, vol. 47(1), pages 39-50, February. [Downloadable!] (restricted)
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