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

Author

Listed:
  • 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.

Suggested Citation

  • Zoltán M. Jakab & Henrik Kucsera & Katalin Szilágyi & Balázs Világi, 2010. "Optimal simple monetary policy rules and welfare in a DSGE Model for Hungary," MNB Working Papers 2010/4, Magyar Nemzeti Bank (Central Bank of Hungary).
    • Handle: RePEc:mnb:wpaper:2010/4
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    File URL: http://www.mnb.hu/letoltes/wp-2010-4.pdf
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    References listed on IDEAS

    as
    1. Sutherland, Alan, 2006. "The expenditure switching effect, welfare and monetary policy in a small open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 30(7), pages 1159-1182, July.
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    More about this item

    Keywords

    monetary policy; central banking; policy design;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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