Optimal Monetary Policy and Price Stability Over the Long-Run
AbstractThis paper examines the role of monetary policy in an environment with aggregate risk and incomplete markets. In a two-period overlapping-generations model with aggregate uncertainty and nominal bonds, optimal monetary policy attains the ex-ante Pareto optimal allocation. This policy aims to stabilize the savings rate in the economy via the effect of expected inflation on real returns of nominal bonds. The equilibrium under optimal monetary policy is characterized by positive average inflation and a nonstationary price level. In an application a key finding is that optimal monetary policy combines features of inflation and price-level targeting.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 07-26.
Length: 46 pages
Date of creation: 2007
Date of revision:
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Monetary policy framework;
Find related papers by JEL classification:
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-04-14 (All new papers)
- NEP-CBA-2007-04-14 (Central Banking)
- NEP-DGE-2007-04-14 (Dynamic General Equilibrium)
- NEP-MAC-2007-04-14 (Macroeconomics)
- NEP-MON-2007-04-14 (Monetary Economics)
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