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Optimal monetary policy in a model of overlapping price contracts

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Jeffrey C. Fuhrer

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Abstract

This study estimates a model of overlapping nominal price contracts over three distinct monetary policy regimes, testing the stability of the parameters in the model across regimes. Upon finding a model that is stable over the three subsamples, the model then holds for the most recent monetary regime is used to compute the optimal policy frontier - the efficient combinations of output and inflation variances - and compared to actual policy performance. The study then evaluates the robustness of policy conclusions to particulars of the specification, and discusses the general properties that are required of a model in order to produce a plausible estimate of the optimal policy frontier.

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Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 94-2.

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Date of creation: 1994
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Publication status: Published in Journal of Money, Credit and Banking 29, no. 2 (May 1997): 214-34.
Handle: RePEc:fip:fedbwp:94-2

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Keywords: Prices ; Monetary policy;

References listed on IDEAS
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  1. Fuhrer, Jeffrey C. & Hooker, Mark A., 1993. "Learning about monetary regime shifts in an overlapping wage contract model," Journal of Economic Dynamics and Control, Elsevier, vol. 17(4), pages 531-553, July. [Downloadable!] (restricted)
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  2. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
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  3. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, vol. 47(5), pages 1267-86, September. [Downloadable!] (restricted)
  4. Jeff Fuhrer & George Moore, 1993. "Monetary policy and the behavior of long-term real interest rates," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
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  5. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February. [Downloadable!] (restricted)
  6. Fuhrer, Jeff & Moore, George, 1992. "Monetary policy rules and the indicator properties of asset prices," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 303-336, April. [Downloadable!] (restricted)
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  1. Aaron Drew & Benjamin Hunt, 1999. "Efficient simple policy rules and the implications of potential output uncertainty," Reserve Bank of New Zealand Discussion Paper Series G99/5, Reserve Bank of New Zealand. [Downloadable!]
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