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Optimal Monetary Policy In A Model With Habit Formation

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  • Jeff Fuhrer

    (Federal Reserve Bank of Boston)

Abstract

A number of recent papers have explored monetary policy options, including inflation targeting and inflation forecast targeting (notably Svensson (1998, 1999, 2000)) and price level targeting (Wolman 1999, Batini and Yates 1999, Blinder 1999). Most papers explore ``optimal'' monetary policy in the context of a single model. However, a number of conclusions made in the literature depend strongly on the model specification used. In addition, most papers have used the efficient policy frontier concept to define optimal monetary policy. This paper investigates the behavior of a variety of small structural macro models under a variety of targeting rules. The paper examines both minimum variance policy frontiers and utility-maximizing policy. In the latter case, an explicit model of consumer behavior with inflation-induced tax distortions is explored.

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2000 with number 306.

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Date of creation: 05 Jul 2000
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Handle: RePEc:sce:scecf0:306

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Postal: CEF 2000, Departament d'Economia i Empresa, Universitat Pompeu Fabra, Ramon Trias Fargas, 25,27, 08005, Barcelona, Spain
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References

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  1. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 93-17, Board of Governors of the Federal Reserve System (U.S.).
  2. repec:fth:harver:1435 is not listed on IDEAS
  3. Lars E.O. Svensson, 2000. "The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap," NBER Working Papers 7957, National Bureau of Economic Research, Inc.
  4. Lars E. O. Svensson, 1996. "Price Level Targeting vs. Inflation Targeting: A Free Lunch?," NBER Working Papers 5719, National Bureau of Economic Research, Inc.
  5. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Mar.
  6. Svensson, Lars E O, 1999. " Inflation Targeting: Some Extensions," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(3), pages 337-61, September.
  7. Frederic S. Mishkin & Adam S. Posen, 1998. "Inflation Targeting: Lessons from Four Countries," NBER Working Papers 6126, National Bureau of Economic Research, Inc.
  8. John C. Williams, 2003. "Simple rules for monetary policy," Economic Review, Federal Reserve Bank of San Francisco, pages 1-12.
  9. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246 National Bureau of Economic Research, Inc.
  10. Fuhrer, Jeffrey C & Moore, George R, 1995. "Monetary Policy Trade-offs and the Correlation between Nominal Interest Rates and Real Output," American Economic Review, American Economic Association, vol. 85(1), pages 219-39, March.
  11. Bennett T. McCallum & Edward Nelson, . "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 1997-71, Carnegie Mellon University, Tepper School of Business.
  12. Alexander L. Wolman, 2003. "Real implications of the zero bound on nominal interest rates," Working Paper, Federal Reserve Bank of Richmond 03-15, Federal Reserve Bank of Richmond.
  13. Arturo Extrella & Jeffrey C. Fuhrer, 1998. "Dynamic inconsistencies: counterfactual implications of a class of rational expectations models," Working Papers, Federal Reserve Bank of Boston 98-5, Federal Reserve Bank of Boston.
  14. Martin Feldstein, 1996. "The Costs and Benefits of Going from Low Inflation to Price Stability," NBER Working Papers 5469, National Bureau of Economic Research, Inc.
  15. Christina D. Romer & David H. Romer, 1997. "Reducing Inflation: Motivation and Strategy," NBER Books, National Bureau of Economic Research, Inc, number rome97-1.
  16. Robert J. Tetlow & Peter von zur Muehlen, 1999. "Simplicity versus optimality the choice of monetary policy rules when agents must learn," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1999-10, Board of Governors of the Federal Reserve System (U.S.).
  17. Batini, Nicoletta & Yates, Anthony, 2003. " Hybrid Inflation and Price-Level Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 35(3), pages 283-300, June.
  18. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
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Citations

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Cited by:
  1. Surach Tanboon & Suchot Piamchol & Tanawat Ruenbanterng & Paiboon Pongpaichet, 2009. "Impacts of Financial Factors on Thailand's Business Cycle Fluctuations," Working Papers 2009-01, Economic Research Department, Bank of Thailand.
  2. Frank Smets & Raf Wouters, 2002. "Monetary policy in an estimated stochastic dynamic general equilibrium model of the Euro area," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Mar.
  3. Minford, Patrick & Nowell, Eric & Sofat, Prakriti & Srinivasan, Naveen, 2006. "UK Inflation Persistence: Policy or Nature?," CEPR Discussion Papers 5608, C.E.P.R. Discussion Papers.
  4. Richard Dennis, 2004. "New Keynesian Optimal-Policy Models: An Empirical Assessment," Royal Economic Society Annual Conference 2004, Royal Economic Society 152, Royal Economic Society.
  5. Siok Kun, Sek, 2009. "The impacts of economic structures on the performance of simple policy rules in a small open economy," MPRA Paper 25065, University Library of Munich, Germany.
  6. Jean-Paul Lam & Greg Tkacz, 2004. "Estimating Policy-Neutral Interest Rates for Canada Using a Dynamic Stochastic General Equilibrium Framework," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), Swiss Society of Economics and Statistics (SSES), vol. 140(I), pages 89-126, March.
  7. Richard Dennis, 2006. "The frequency of price adjustment and New Keynesian business cycle dynamics," Working Paper Series 2006-22, Federal Reserve Bank of San Francisco.
  8. Caraiani, Petre, 2007. "An Estimated New Keynesian Model for Romania," Journal for Economic Forecasting, Institute for Economic Forecasting, Institute for Economic Forecasting, vol. 4(4), pages 114-123, December.
  9. Raf Wouters & Frank Smets, 2005. "Comparing shocks and frictions in US and euro area business cycles: a Bayesian DSGE Approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 20(2), pages 161-183.
  10. Richard Dennis, 2004. "Specifying and estimating New Keynesian models with instrument rules and optimal monetary policies," Working Paper Series 2004-17, Federal Reserve Bank of San Francisco.
  11. Surach Tanboon, 2008. "The Bank of Thailand Structural Model for Policy Analysis," Working Papers 2008-06, Economic Research Department, Bank of Thailand.
  12. Urban Jermann, 2002. "EconomicDynamics Interviews Urban Jermann on Asset Pricing," EconomicDynamics Newsletter, Review of Economic Dynamics, Review of Economic Dynamics, vol. 3(2), April.
  13. Smets, Frank & Wouters, Raf, 2002. "An estimated stochastic dynamic general equilibrium model of the euro area," Working Paper Series, European Central Bank 0171, European Central Bank.

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