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Optimal Policy under Commitment and Price Level Stationarity

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  • Gino Cateau
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    Abstract

    This 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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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp09-8.pdf
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    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 09-8.

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    Length: 23 pages
    Date of creation: 2009
    Date of revision:
    Handle: RePEc:bca:bocawp:09-8

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    Keywords: Monetary policy framework;

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    References

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    1. Vítor Gaspar & Frank Smets & David Vestin, 2007. "Is Time Ripe for Price Level Path Stability?," Working Papers w200719, Banco de Portugal, Economics and Research Department.
    2. Richard Dennis, 2001. "The policy preferences of the U.S. Federal Reserve," Working Paper Series 2001-08, Federal Reserve Bank of San Francisco.
    3. Oleksiy Kryvtsov & Malik Shukayev & Alexander Ueberfeldt, 2007. "Optimal Monetary Policy and Price Stability Over the Long-Run," Working Papers 07-26, Bank of Canada.
    4. 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.
    5. 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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