Conditional Welfare Comparisons of Monetary Policy Rules
AbstractLiterature on monetary policy can be broadly classified into two categories. The first category involves the construction of dynamic stochastic general-equilibrium models for monetary policy. The solid micro foundations built into these models are important because they facilitate interpretation of outcomes and cross-validation with the results of other studies: the hope is that better micro foundations will yield better positive macroeconomics. However, solid micro foundations are also important because they provide an appealing basis for the second category of monetary policy analysis which involves welfare evaluations of various monetary policy rules. Welfare analysis of monetary policy rules requires researchers to make two inevitable decisions. They are what kind of criterion to use in ranking different policy rules and what kind of policy rules to consider. In comparison to the practices of normative monetary policy analysis, we propose that welfare evaluations of monetary policy follow the following practice. First, to be consistent with microfoundation based on the consumer problem, we used the conditional welfare---rather than the unconditional welfare---as a criterion. Furthermore, unlike the timeless perspective, we claim that the conditional welfare should be evaluated at the time of adopting the rules. Second, due to the problems associated with time inconsistency of Ramsey solutions, we propose that we find the best policy among a class of `reasonable' time-invariant policy rules. We think that `reasonable' policies are implementable and easy to communicate. We present example economies and investigate the optimal policy under the good practice we propose. After finding the optimal policy, we evaluate the potential costs of other policies such as discretion and timeless perspective. The first example is a simple New Keynesian model, such as the benchmark case by Clarida, Gali and Gertler (1999). In the case when there is no distortion due to monopolistic competition, we show that the optimal policy according to our proposed approach is different from other time invariant rules such as the timeless perspective as far as the current state of the economy is not at its deterministic steady state. The other example is the model by Christiano, Eichenbaum and Evans (2004) which incorporates the monopolistic distortion and so induces another different between our proposed approach and other approaches.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 148.
Date of creation: 11 Nov 2005
Date of revision:
Optimal policy; Timeless perspective; Conditional welfare;
Other versions of this item:
- Andy Levin & Jinill Kim, 2004. "Conditional Welfare Comparisons of Monetary Policy Rules," Econometric Society 2004 Far Eastern Meetings 667, Econometric Society.
- Andy Levin & Jinill Kim, 2004. "Conditional Welfare Comparisons of Monetary Policy Rules," Computing in Economics and Finance 2004 252, Society for Computational Economics.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Faia, Ester, 2007.
"Ramsey monetary policy with labour market frictions,"
Working Paper Series
0707, European Central Bank.
- Faia, Ester, 2009. "Ramsey monetary policy with labor market frictions," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 570-581, May.
- Faia, Ester, 2006.
"Optimal monetary policy rules with labor market frictions,"
Working Paper Series
0698, European Central Bank.
- Faia, Ester, 2008. "Optimal monetary policy rules with labor market frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 32(5), pages 1600-1621, May.
- Sauer, Stephan, 2007. "Discretion rather than rules? When is discretionary policy-making better than the timeless perspective?," Working Paper Series 0717, European Central Bank.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).
If references are entirely missing, you can add them using this form.