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A Promised Value Approach to Optimal Monetary Policy

Author

Listed:
  • Timothy Hills

    (New York University)

  • Taisuke Nakata

    (University of Tokyo)

  • Takeki Sunakawa

    (Hitotsubashi University)

Abstract

This paper characterizes optimal commitment policy in the New Keynesian model using a recursive formulation of the central bank's in finite horizon optimization problem in which promised inflation and output gap - as opposed to lagged Lagrange multipliers - act as pseudo-state variables. Our recursive formulation is motivated by Kydland and Prescott (1980). Using three well known variants of the model - one featuring inflation bias, one featuring stabilization bias, and one featuring a lower bound constraint on nominal interest rates - we show that the proposed formulation sheds new light on the nature of the intertemporal trade-off facing the central bank.

Suggested Citation

  • Timothy Hills & Taisuke Nakata & Takeki Sunakawa, 2020. "A Promised Value Approach to Optimal Monetary Policy," CARF F-Series CARF-F-481, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    • Handle: RePEc:cfi:fseres:cf481
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    References listed on IDEAS

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    Cited by:

    1. He Nie & Jordan Roulleau-Pasdeloup, 2023. "The promises (and perils) of control-contingent forward guidance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 49, pages 77-98, July.
    2. Yasuo Hirose & Takeki Sunakawa, 2019. "Review of Solution and Estimation Methods for Nonlinear Dynamic Stochastic General Equilibrium Models with the Zero Lower Bound," The Japanese Economic Review, Springer, vol. 70(1), pages 51-104, March.
    3. Dengler, Thomas & Gerke, Rafael & Giesen, Sebastian & Kienzler, Daniel & Röttger, Joost & Scheer, Alexander & Wacks, Johannes, 2024. "A primer on optimal policy projections," Technical Papers 01/2024, Deutsche Bundesbank.

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    More about this item

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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