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Optimal simple monetary policy rules and welfare in a DSGE Model for Hungary

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Author Info

  • Zoltán M. Jakab

    ()
    (Office of Fiscal Council)

  • Henrik Kucsera

    ()
    (Magyar Nemzeti Bank)

  • Katalin Szilágyi

    ()
    (Magyar Nemzeti Bank)

  • Balázs Világi

    ()
    (Magyar Nemzeti Bank)

Abstract

We explore the properties of welfare-maximizing monetary policy in a medium-scale DSGE model for Hungary. In order to make our results operational from a policymaker’s perspective, we approximate the optimal policy rule with a set of simple rules reacting only to observable variables. Our results suggest that “science of monetary policy” that is found robust in simple models, holds in this medium-scaled setting as well. That is, the welfare-maximizing policy that aims to eliminate distortions associated with nominal rigidities can be approximated by a simple inflation targeting rule. Adding exchange rate into the feedback rule only marginally improves the stabilization properties of the policy rule. However, a rule reacting to wage inflation can be significantly welfare-improving. These results may suggest that in our medium-sized model the distortions associated with sticky wage setting have at least as important welfare implications as those related to the price stickiness in product markets.

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Bibliographic Info

Paper provided by Magyar Nemzeti Bank (the central bank of Hungary) in its series MNB Working Papers with number 2010/4.

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Length: 41 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:mnb:wpaper:2010/4

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Keywords: monetary policy; central banking; policy design;

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