Robustly Optimal Monetary Policy
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.Download Info
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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0840.Length:
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:cep:cepdps:dp0840
Contact details of provider:
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;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-2007-12-15 (All new papers)
- NEP-CBA-2007-12-15 (Central Banking)
- NEP-MAC-2007-12-15 (Macroeconomics)
- NEP-MON-2007-12-15 (Monetary Economics)
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- 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.
- Saborowski, Christian, 2010. "Inflation targeting as a means of achieving disinflation," Journal of Economic Dynamics and Control, Elsevier, vol. 34(12), pages 2510-2532, December.
- Michael Woodford, 2010.
"Optimal Monetary Stabilization Policy,"
Discussion Papers
0910-18, Columbia University, Department of Economics.
- Woodford, Michael, 2010. "Optimal Monetary Stabilization Policy," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 14, pages 723-828 Elsevier.
- Michael Woodford, 2010. "Optimal Monetary Stabilization Policy," NBER Working Papers 16095, National Bureau of Economic Research, Inc.
- Kevin D. Sheedy, 2007.
"Intrinsic Inflation Persistence,"
CEP Discussion Papers
dp0837, Centre for Economic Performance, LSE.
- Sheedy, Kevin D., 2010. "Intrinsic inflation persistence," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 1049-1061, November.
- 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).
- Simon Wren-Lewis & Fabian Eser, 2009. "When is Monetary Policy All we Need?," Economics Series Working Papers 430, University of Oxford, Department of Economics.
- Fabian Eser & Campbell Leith & Simon Wren-Lewis, 2009. "When is monetary policy all we need?," Working Papers 2009_18, Business School - Economics, University of Glasgow.
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