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Optimal operational monetary policy rules in an endogenous growth model: a calibrated analysis

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  • Arato, Hiroki

Abstract

We construct an endogenous growth model with new Keynesian-type sticky prices and wages. In this model, monetary policy affects long-run output growth. We characterize the optimal operational monetary policy rule in this economy. We find that even though stabilization of output growth increases long-run output growth, the optimal monetary policy rule is the rule that makes interest rate respond to price and wage actively and output growth mutely, similar as in exogenous growth models. We also find that the optimal monetary policy rule virtually maximizes mean growth. These results suggest that although long-run growth is important for welfare, new Keynesian's claim that monetary policy should stabilize nominal variables is highly robust.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8547.

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Date of creation: May 2008
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Handle: RePEc:pra:mprapa:8547

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Keywords: Monetary policy; Sticky price and wage; Business cycle fluctuations; Productivity growth;

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