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Welfare-based monetary policy rules in an estimated DSGE model of the US economy

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Author Info
Michel Juillard () (CEPREMAP and University Paris 8, 2 rue de la Liberté, 93526 Saint-Denis Cedex 02, France.)
Philippe Karam () (International Monetary Fund (IMF), 700 19th Street NW, Washington, DC 20431, United States.)
Douglas Laxton () (International Monetary Fund (IMF), 700 19th Street NW, Washington, DC 20431, United States.)
Paolo Pesenti () (NBER, CEPR and Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045, United States.)

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Abstract

We develop and estimate a stylized micro-founded model of the US economy. Next we compute the parameters of a simple interest rate policy rule that maximizes the unconditional mean of utility. We show that such a welfare-based rule lies close to the Taylor efficiency frontier. A counterfactual analysis assesses to what extent using such a rule as a guideline for monetary policy would have helped to avoid the inflationary swings of the 1970s and reduce the severity of boom and bust cycles. The paper also provides estimates of the welfare implications of business cycle variability and discusses their relevance. JEL Classification: C51; E31; E52.

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Paper provided by European Central Bank in its series Working Paper Series with number 613.

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Length: 66 pages
Date of creation: Apr 2006
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Handle: RePEc:ecb:ecbwps:20060613

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Related research
Keywords: Competition; markups; monetary policy; Taylor rule.;

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