Optimal Interest-Rate Rules: I. General Theory
AbstractThis paper proposes a general method for deriving an optimal monetary policy rule in the case of a dynamic linear rational-expectations model and a quadratic objective function for policy. A commitment to a rule of the type proposed results in a determinate equilibrium in which the responses to shocks are optimal. Furthermore, the optimality of the proposed policy rule is independent of the specification of the stochastic disturbances. Finally, the proposed rules can be justified from a timeless perspective,' so that commitment to such a rule need not imply time-inconsistent policy. We show that under fairly general condition, optimal policy can by represented by a generalized Taylor rule, in which however the relation between the interest-rate instrument and the other target variables is not purely contemporaneous, as in Taylor's specification. We also offer general conditions under which optimal policy can be represented by a 'super-inertial' interest-rate rule, and under which it can be represented by a pure 'targeting rule' that makes no explicit reference to the path of the instrument.
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Bibliographic InfoPaper provided by UCLA Department of Economics in its series Levine's Bibliography with number 506439000000000384.
Date of creation: 14 Mar 2003
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Other versions of this item:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-03-19 (All new papers)
- NEP-FIN-2003-03-19 (Finance)
- NEP-MAC-2003-03-19 (Macroeconomics)
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- Nicoletta Batini & Joseph Pearlman, 2002.
"Too Much Too Soon: Instability and Indeterminacy with Forward-Looking Rules,"
08, Monetary Policy Committee Unit, Bank of England.
- Nicoletta Batini & Joe Pearlman, 2002. "Too Much Too Soon: Instability and Indeterminacy with Forward-Looking Rules," Computing in Economics and Finance 2002 182, Society for Computational Economics.
- Bennett T. McCallum, 1997.
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- Marc P. Giannoni, 2007. "Robust optimal monetary policy in a forward-looking model with parameter and shock uncertainty," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(1), pages 179-213.
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- Currie,David & Levine,Paul, 2009. "Rules, Reputation and Macroeconomic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521104609, October.
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