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Optimal Monetary Stabilization Policy

In: Handbook of Monetary Economics

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  • Woodford, Michael

Abstract

This chapter reviews the theory of optimal monetary stabilization policy in New Keynesian models, with particular emphasis on developments since the treatment of this topic in Woodford (2003). The primary emphasis of the chapter is on methods of analysis that are useful in this area, rather than on final conclusions about the ideal conduct of policy (that are obviously model-dependent, and hence dependent on the stand that one might take on many issues that remain controversial), and on general themes that have been found to be important under a range of possible model specifications.1 With regard to methodology, some of the central themes of this review will be the application of the method of Ramsey policy analysis to the problem of the optimal conduct of monetary policy, and the connection that can be established between utility maximization and linear-quadratic policy problems of the sort often considered in the central banking literature. With regard to the structure of a desirable decision framework for monetary policy deliberations, some of the central themes will be the importance of commitment for a superior stabilization outcome, and more generally, the importance of advance signals about the future conduct of policy, the advantages of history-dependent policies over purely forward-looking approaches, and the usefulness of a target criterion as a way of characterizing a central bank's policy commitment.

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This chapter was published in:

  • Benjamin M. Friedman & Michael Woodford (ed.), 2010. "Handbook of Monetary Economics," Handbook of Monetary Economics, Elsevier, edition 1, volume 3, number 3, January.
    This item is provided by Elsevier in its series Handbook of Monetary Economics with number 3-14.

    Handle: RePEc:eee:monchp:3-14

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    Related research

    Keywords: Ramsey Policy; Timeless Perspective; Commitment; Discretion; Loss Function; Linear-Quadratic Approximation; Forecast Targeting; Target Criterion; Inflation Target; Price-Level Target; Zero Lower Bound;

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    Cited by:
    1. Ricjard Kneller & Danny McGowan, . "Tax Policy and Firm Entry and Exit Dynamics: Evidence from OECD Countries," Discussion Papers 12/01, University of Nottingham, School of Economics.
    2. Marc P. Giannoni, 2012. "Optimal interest rate rules and inflation stabilization versus price-level stabilization," Staff Reports 546, Federal Reserve Bank of New York.
    3. Rhee, Hyuk Jae & Turdaliev, Nurlan, 2013. "Central bank transparency: Does it matter?," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 183-197.
    4. Leung, Charles Ka Yui & Teo, Wing Leong, 2010. "Should the optimal portfolio be region-specific? A multi-region model with monetary policy and asset price co-movements," MPRA Paper 28216, University Library of Munich, Germany.

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