Optimal Policy under Commitment and Price Level Stationarity
AbstractThis paper proposes a simple analytical method to determine the stationarity of an unnormalized variable from the solution to a normalized model i.e. a model whose variables must be expressed in relative terms or must be differenced for a solution to exist. The paper then applies the method to answer a question of interest to policy-makers: does optimal policy under commitment lead to stationarity in the price level? Unlike Gaspar, Smets, and Vestin (2007), the paper finds that optimal policy under commitment does not lead to price level stationarity in the Smets and Wouters (2003) model.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 09-8.
Length: 23 pages
Date of creation: 2009
Date of revision:
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Monetary policy framework;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-03-07 (All new papers)
- NEP-CBA-2009-03-07 (Central Banking)
- NEP-MAC-2009-03-07 (Macroeconomics)
- NEP-MON-2009-03-07 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Vítor Gaspar & Frank Smets & David Vestin, 2007.
"Is Time Ripe for Price Level Path Stability?,"
w200719, Banco de Portugal, Economics and Research Department.
- Richard Dennis, 2001.
"The policy preferences of the U.S. Federal Reserve,"
Working Paper Series
2001-08, Federal Reserve Bank of San Francisco.
- Oleksiy Kryvtsov & Malik Shukayev & Alexander Ueberfeldt, 2007. "Optimal Monetary Policy and Price Stability Over the Long-Run," Working Papers 07-26, Bank of Canada.
- Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
- Anderson, Gary & Moore, George, 1985. "A linear algebraic procedure for solving linear perfect foresight models," Economics Letters, Elsevier, vol. 17(3), pages 247-252.
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