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Robustly optimal monetary policy

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Author Info

  • 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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File URL: http://eprints.lse.ac.uk/3737/
File Function: Open access version.
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 3737.

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Length: 74 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:ehl:lserod:3737

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Related research

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

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Cited by:
  1. Michael Woodford, 2010. "Optimal Monetary Stabilization Policy," NBER Working Papers 16095, National Bureau of Economic Research, Inc.
  2. 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.
  3. Kevin D. Sheedy, 2007. "Intrinsic Inflation Persistence," CEP Discussion Papers dp0837, Centre for Economic Performance, LSE.
  4. 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.

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