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Robustly Optimal Monetary Policy

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  • Kevin D. Sheedy

Abstract

This paper analyses optimal monetary policy in response to shocks using a model that avoids making specific assumptions about the stickiness of prices, and thus the nature of the Phillips curve. Nonetheless, certain robust features of the optimal monetary policy commitment are found. The optimal policy rule is a flexible inflation target which is adhered to in the short run without any accommodation of structural inflation persistence, that is, inflation which it is costly to eliminate. The target is also made more stringent when it has been missed in the past. With discretion on the other hand, the target is loosened to accommodate fully any structural inflation persistence, and any past deviations from the inflation target are ignored. These results apply to a wide range of price stickiness models because the market failure which the policymaker should aim to mitigate arises from imperfect competition, not from price stickiness itself.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0840.

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Date of creation: Nov 2007
Date of revision:
Handle: RePEc:cep:cepdps:dp0840

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

Related research

Keywords: Inflation persistence; optimal monetary policy; rules versus discretion; stabilization bias; inflation targeting;

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Cited by:
  1. Saborowski, Christian, 2009. "Inflation Targeting as a Means of Achieving Disinflation," The Warwick Economics Research Paper Series (TWERPS) 894, University of Warwick, Department of Economics.
  2. Michael Woodford, 2010. "Optimal Monetary Stabilization Policy," Discussion Papers 0910-18, Columbia University, Department of Economics.
  3. Kevin D. Sheedy, 2007. "Intrinsic Inflation Persistence," CEP Discussion Papers dp0837, Centre for Economic Performance, LSE.
  4. Leith, Campbell & Wren-Lewis, Simon, 2009. "When is Monetary Policy All we Need?," SIRE Discussion Papers 2009-25, Scottish Institute for Research in Economics (SIRE).

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