Optimal Time Consistent Monetary Policy
AbstractWe discuss the issue of time consistency of monetary policy. We develop a simple and intuitive procedure to derive analytically the unconditionally optimal (UO) policy in a general linear-quadratic set-up, a perspective stressed by Taylor (1979) and Whiteman (1986). We compare the UO perspective on optimal monetary policy with alternative approaches. We use our approach in simple backward- and forward-looking models and argue that the UO perspective is worthy of renewed interest.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 0606.
Date of creation: Jun 2006
Date of revision: Jan 2007
Contact details of provider:
Postal: School of Economics and Finance, University of St. Andrews, Fife KY16 9AL
Phone: 01334 462420
Fax: 01334 462444
Web page: http://www.st-andrews.ac.uk/cdma
More information through EDIRC
Time consistency; unconditional expectation; timeless perspective; optimal policy.;
Find related papers by JEL classification:
- E20 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-06-24 (All new papers)
- NEP-CBA-2006-06-24 (Central Banking)
- NEP-MAC-2006-06-24 (Macroeconomics)
- NEP-MON-2006-06-24 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Christian Jensen & Bennett T. Mccallum, 2010. "Optimal Continuation versus the Timeless Perspective in Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(6), pages 1093-1107, 09.
- Julio J. Rotemberg & Michael Woodford, 1998. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version," NBER Technical Working Papers 0233, National Bureau of Economic Research, Inc.
- Soderlind, Paul, 1999.
"Solution and estimation of RE macromodels with optimal policy,"
European Economic Review,
Elsevier, vol. 43(4-6), pages 813-823, April.
- Söderlind, Paul, 1998. "Solution and Estimation of RE Macromodels with Optimal Policy," Working Paper Series in Economics and Finance 256, Stockholm School of Economics.
- Blake, Andrew P. & Kirsanova, Tatiana, 2004.
"A note on timeless perspective policy design,"
Elsevier, vol. 85(1), pages 9-16, October.
- Tatiana Kirsanova, 2004. "A note on timeless perspective policy design," Money Macro and Finance (MMF) Research Group Conference 2003 50, Money Macro and Finance Research Group.
- Julio J. Rotemberg & Michael Woodford, 1998.
"Interest-Rate Rules in an Estimated Sticky Price Model,"
NBER Working Papers
6618, National Bureau of Economic Research, Inc.
- Julio J. Rotemberg & Michael Woodford, 1999. "Interest Rate Rules in an Estimated Sticky Price Model," NBER Chapters, in: Monetary Policy Rules, pages 57-126 National Bureau of Economic Research, Inc.
- Whiteman, Charles H, 1986. "An Analytical Policy Design under Rational Expectations," Econometrica, Econometric Society, vol. 54(6), pages 1387-1405, November.
- Richard Clarida & Jordi Gali & Mark Gertler, 1999.
"The Science of Monetary Policy: A New Keynesian Perspective,"
NBER Working Papers
7147, National Bureau of Economic Research, Inc.
- Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
- Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
- Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
- Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
- Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999.
"Optimal monetary policy with staggered wage and price contracts,"
International Finance Discussion Papers
640, Board of Governors of the Federal Reserve System (U.S.).
- Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
- Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999. "Optimal Monetary Policy with Staggered Wage and Price Contracts," Computing in Economics and Finance 1999 1151, Society for Computational Economics.
- Robert J. Barro, 1999. "Ramsey Meets Laibson In The Neoclassical Growth Model," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1125-1152, November.
- Christian Jensen & Bennett C. McCallum, 2002.
"The Non-Optimality of Proposed Monetary Policy Rules Under Timeless-Perspective Commitment,"
NBER Working Papers
8882, National Bureau of Economic Research, Inc.
- Jensen, Christian & McCallum, Bennett T., 2002. "The non-optimality of proposed monetary policy rules under timeless perspective commitment," Economics Letters, Elsevier, vol. 77(2), pages 163-168, October.
- Blake, Andrew P., 2002.
"A 'Timeless Perspective' on Optimality in Forward-Looking Rational Expectations Models,"
Royal Economic Society Annual Conference 2002
30, Royal Economic Society.
- Andrew P. Blake, 2001. "A `Timeless Perspective' on Optimality in Forward-Looking Rational Expectations Models," NIESR Discussion Papers 188, National Institute of Economic and Social Research.
- Kollmann, Robert, 2002.
"Monetary policy rules in the open economy: effects on welfare and business cycles,"
Journal of Monetary Economics,
Elsevier, vol. 49(5), pages 989-1015, July.
- Kollmann, Robert, 2002. "Monetary Policy Rules in the Open Economy: Effects on Welfare and Business Cycles," CEPR Discussion Papers 3279, C.E.P.R. Discussion Papers.
- Robert Kollmann, 2002. "Monetary policy rules in the open economy: effects of welfare and business cycles," ULB Institutional Repository 2013/7628, ULB -- Universite Libre de Bruxelles.
- Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, vol. 47(5), pages 1267-86, September.
- Marc P. Giannoni & Michael Woodford, 2003.
"Optimal Interest-Rate Rules: I. General Theory,"
506439000000000384, UCLA Department of Economics.
- Somers, Harold M, 1971. "On the Demise of the Social Discount Rate," Journal of Finance, American Finance Association, vol. 26(2), pages 565-78, May.
- Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
- Michal Horvath, 2011.
"Alternative Perspectives on Optimal Public Debt Adjustment,"
The B.E. Journal of Macroeconomics,
De Gruyter, vol. 11(1), pages 34.
- Michal Horvath, 2006. " Alternative Perspectives on Optimal Public Debt Adjustment," CDMA Working Paper Series 0607, Centre for Dynamic Macroeconomic Analysis, revised Sep 2011.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bram Boskamp).
If references are entirely missing, you can add them using this form.