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Optimal monetary policy in an estimated SIR model

Author

Listed:
  • Ghassane Benmir

    (LSE - Department of Statistics - London School of Economics - LSE - London School of Economics and Political Science)

  • Ivan Jaccard

    (Centre de recherche de la Banque Centrale européenne - Banque Centrale Européenne)

  • Gauthier Vermandel

    (CMAP - Centre de Mathématiques Appliquées - Ecole Polytechnique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique, LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique, Centre de recherche de la Banque de France - Banque de France)

Abstract

This paper studies the design of Ramsey optimal monetary policy in a Health New Keynesian (HeNK) model with Susceptible, Infected and Recovered (SIR) agents. The nonlinear model is estimated with maximum likelihood techniques on Euro Area data. Our objective is to deconstruct the mechanism by which contagion risk affects the conduct of monetary policy. If monetary policy is the only game in town, we find that optimal policy features significant deviations from price stability to mitigate the effect of the pandemic. The best outcome is obtained when the optimal Ramsey policy is combined with a lockdown strategy of medium intensity. In this case, monetary policy can concentrate on its price stabilization objective.

Suggested Citation

  • Ghassane Benmir & Ivan Jaccard & Gauthier Vermandel, 2023. "Optimal monetary policy in an estimated SIR model," Post-Print hal-04502674, HAL.
    • Handle: RePEc:hal:journl:hal-04502674
    DOI: 10.1016/j.euroecorev.2023.104502
    as

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    Keywords

    SIR;

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