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Optimal Opportunistic Monetary Policy in a New-Keynesian Model

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Author Info

  • Marzo, Massimiliano

    ()
    (University of Bolonga and Johns Hopkins University)

  • Strid, Ingvar

    ()
    (Stockholm School of Economics)

  • Zagaglia, Paolo

    ()
    (Dept. of Economics, Stockholm University)

Abstract

The present paper compares the performance in terms of second order accurate welfare of opportunistic non-linear Taylor rules and with respect to traditional linear Taylor rules. The macroeconomic model representing the benchmark for the analysis includes capital accumulation (with quadratic costs of adjustment), price rigidities (quadratic approach), along the standard New-Keynesian approach. The model is solved up to second order approximation and welfare is evaluated according to several criteria (conditional to the non-stochastic steady state, unconditional, and according to a linear ad hoc function). The results show that: (i) the opportunistic rule is a Pareto improvement with respect to other monetary policy rules traditionally considered in the literature; (ii) the computation of welfare costs reveals that the burden of adjustment is almost entirely on labor supply fluctuations; (iii) increasing the degree of price rigidities and the degree of competition in the final goods markets, makes the opportunistic rule even more preferable with respect to the alternatives. Business Cycle statistics for the model with opportunistic rule show a large volatility in labor supply, with a limited volatility for the nominal interest rate.

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Bibliographic Info

Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2006:8.

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Length: 35 pages
Date of creation: 20 Sep 2006
Date of revision:
Handle: RePEc:hhs:sunrpe:2006_0008

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Postal: Department of Economics, Stockholm, S-106 91 Stockholm, Sweden
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Keywords: disinflation; monetary policy rules; nonlinear rules; Taylor rules;

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References

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  1. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  2. V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can sticky price models generate volatile and persistent real exchange rates?," Staff Report 277, Federal Reserve Bank of Minneapolis.
  3. Robert Kollmann, 2004. "Welfare Maximizing Monetary and Fiscal Policy Rules," Computing in Economics and Finance 2004 102, Society for Computational Economics.
  4. Antulio N. Bomfim & Glenn D. Rudebusch, 1997. "Opportunistic and deliberate disinflation under imperfect credibility," Working Papers in Applied Economic Theory 97-07, Federal Reserve Bank of San Francisco.
  5. Aksoy, Yunus & Orphanides, Athanasios & Small, David & Wieland, Volker & Wilcox, David, 2003. "A Quantitative Exploration of the Opportunistic Approach to Disinflation," CEPR Discussion Papers 4073, C.E.P.R. Discussion Papers.
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  13. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  14. Eric Swanson & Gary Anderson & Andrew Levin, 2006. "Higher-order perturbation solutions to dynamic, discrete-time rational expectations models," Working Paper Series 2006-01, Federal Reserve Bank of San Francisco.
  15. Kim, Jinill, 2000. "Constructing and estimating a realistic optimizing model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 329-359, April.
  16. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Solving Dynamic General Equilibrium Models Using a Second-Order Approximation to the Policy Function," Departmental Working Papers 200106, Rutgers University, Department of Economics.
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  18. Svensson, Lars O, 2005. "Monetary Policy with Judgment: Forecast Targeting," MPRA Paper 819, University Library of Munich, Germany.
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Cited by:
  1. L. Marattin & M. Marzo & P. Zagaglia, 2009. "Distortionary tax instruments and implementable monetary policy," Working Papers 684, Dipartimento Scienze Economiche, Universita' di Bologna.
  2. Paolo Zagaglia, 2007. "Operational Fiscal and Monetary Policy with Staggered Wage and Price Dynamics," Finnish Economic Papers, Finnish Economic Association, vol. 20(2), pages 121-138, Autumn.

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