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Satisficing Solutions for New Zealand Monetary Policy

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Abstract

Computing 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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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2007/03.

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Length: 37 p.
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:nzb:nzbdps:2007/03

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  1. Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers, Stockholm University, Institute for International Economic Studies 638, Stockholm University, Institute for International Economic Studies.
  2. Kaushik Mitra & Seppo Honkapohja, 2004. "Learning Stability in Economies with Heterogenous Agents," Royal Holloway, University of London: Discussion Papers in Economics, Department of Economics, Royal Holloway University of London 04/17, Department of Economics, Royal Holloway University of London, revised Jul 2004.
  3. Bennett T. McCallum, 2005. "A Monetary Policy Rule for Automatic Prevention of a Liquidity Trap," NBER Working Papers 11056, National Bureau of Economic Research, Inc.
  4. Dominique Pujal & Patrick Saint-Pierre, 2006. "Capture Basin Algorithm for Evaluating and Managing Complex Financial Instruments," Computing in Economics and Finance 2006, Society for Computational Economics 186, Society for Computational Economics.
  5. Fuhrer, Jeff & Moore, George, 1995. "Inflation Persistence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(1), pages 127-59, February.
  6. Martinet, V. & Doyen, L., 2007. "Sustainability of an economy with an exhaustible resource: A viable control approach," Resource and Energy Economics, Elsevier, Elsevier, vol. 29(1), pages 17-39, January.
  7. David Hargreaves & Hannah Kite & Bernard Hodgetts, 2006. "Modelling New Zealand inflation in a Phillips curve," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, Reserve Bank of New Zealand, vol. 69, September.
  8. Krawczyk, Jacek & Kim, Kunhong, 2009. "Satisficing Solutions To A Monetary Policy Problem," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 13(01), pages 46-80, February.
  9. Bene, C. & Doyen, L. & Gabay, D., 2001. "A viability analysis for a bio-economic model," Ecological Economics, Elsevier, Elsevier, vol. 36(3), pages 385-396, March.
  10. Kirdan Lees, 2003. "The stabilisation problem: the case of New Zealand," Reserve Bank of New Zealand Discussion Paper Series, Reserve Bank of New Zealand DP2003/08, Reserve Bank of New Zealand.
  11. Hansen, Lars Peter & Sargent, Thomas J. & Turmuhambetova, Gauhar & Williams, Noah, 2006. "Robust control and model misspecification," Journal of Economic Theory, Elsevier, Elsevier, vol. 128(1), pages 45-90, May.
  12. Hélène Clément-Pitiot & Patrick Saint Pierre, 2006. "Goodwin's models through viability analysis: some lights for contemporary political economics regulations," Computing in Economics and Finance 2006, Society for Computational Economics 100, Society for Computational Economics.
  13. Jeffery D. Amato & Thomas Laubach, 1999. "The value of interest rate smoothing : how the private sector helps the Federal Reserve," Economic Review, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, issue Q III, pages 47-64.
  14. Paul Conway & Ben Hunt, 1997. "Estimating potential output: a semi-structural approach," Reserve Bank of New Zealand Discussion Paper Series, Reserve Bank of New Zealand G97/9, Reserve Bank of New Zealand.
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Cited by:
  1. Jacek Krawczyk & Kunhong Kim, 2014. "Viable Stabilising Non-Taylor Monetary Policies for an Open Economy," Computational Economics, Society for Computational Economics, Society for Computational Economics, vol. 43(2), pages 233-268, February.
  2. Krawczyk, Jacek B & Pharo, Alastair S, 2011. "Manual of VIKAASA: An application capable of computing and graphing viability kernels for simple viability problems," Working Paper Series, Victoria University of Wellington, School of Economics and Finance 1878, Victoria University of Wellington, School of Economics and Finance.
  3. Krawczyk, Jacek B. & Serea, Oana-Silvia, 2007. "A viability theory approach to a two-stage optimal control problem," MPRA Paper 10103, University Library of Munich, Germany.
  4. Krawczyk, Jacek B & Pharo, Alastair & Simpson, Mark, 2011. "Approximations to viability kernels for sustainable macroeconomic policies," Working Paper Series, Victoria University of Wellington, School of Economics and Finance 1531, Victoria University of Wellington, School of Economics and Finance.

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