Satisficing Solutions for New Zealand Monetary Policy
AbstractComputing the optimal trajectory over time of key variables is a standard exercise in decision-making and the analysis of many dynamic systems. In practice however, it is often enough to ensure that these variables evolve within certain bounds. In this paper we study the problem of setting monetary policy in a `good enough' sense, rather than in the optimising sense more common in the literature. Important advantages of our satisficing approach over policy optimisation include greater robustness to model, parameter, and shock uncertainty, and a better characterisation of imprecisely defined monetary policy goals. Also, optimisation may be unsuitable for determining prescriptive policy in that it suggests a unique 'best' solution while many solutions may be satisficing. Our analysis frames the monetary policy problem in the context of viability theory which rigorously captures the notion of satisficing. We estimate a simple closed economy model on New Zealand data and use viability theory to discuss how inflation, output, and interest rate may be maintained within some acceptable bounds. We derive monetary policy rules that achieve such an outcome endogenously.
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Bibliographic InfoPaper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2007/03.
Length: 37 p.
Date of creation: Mar 2007
Date of revision:
Find related papers by JEL classification:
- C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-03-31 (All new papers)
- NEP-CBA-2007-03-31 (Central Banking)
- NEP-MAC-2007-03-31 (Macroeconomics)
- NEP-MON-2007-03-31 (Monetary Economics)
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