Conditional Welfare Comparisons of Monetary Policy Rules
AbstractVarious approaches to optimal monetary policy have been used to select time-invariant policy rules, including the timeless perspective approach by Woodford (1999) and the unconditional expected utility criterion of McCallum (2000). In this paper, we argue instead that policy rules should be evaluated in terms of the household"s conditional welfare at the time of adoption, integrated over the ergodic distribution of initial conditions generated by the previous policy. Thus, the performance of time-invariant rules can be compared against the benchmark value achieved by the Ramsey solution, while ensuring that the coefficients of the rule are not fine-tuned to specific values of the initial conditions. Finally, using the benchmark new Keynesian model, we consider the case when the initial conditions are generated by optimal policy under discretion, and show that the optimal time-invariant rule yields conditional welfare superior to that of the rules previously proposed in the literature
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 252.
Date of creation: 11 Aug 2004
Date of revision:
monetary policy rules; time invariant rules; timeless perspective; conditional welfare;
Other versions of this item:
- Andrew Levin & Jinill Kim, 2005. "Conditional Welfare Comparisons of Monetary Policy Rules," Computing in Economics and Finance 2005 148, Society for Computational Economics.
- Andy Levin & Jinill Kim, 2004. "Conditional Welfare Comparisons of Monetary Policy Rules," Econometric Society 2004 Far Eastern Meetings 667, Econometric Society.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
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