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A General Schema for Optimal Monetary Policymaking: Objectives and Rules

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  • Huiping Yuan

    (Xiamen University)

  • Stephen M. Miller

    (University of Connecticut and University of Nevada, Las Vegas)

Abstract

This paper examines four equivalent methods of optimal monetary policymaking, committing to the social loss function, using discretion with the central bank long-run and short-run loss functions, and following monetary policy rules. All lead to optimal economic performance. The same performance emerges from these different policymaking methods because the central bank actually follows the same (similar) policy rules. These objectives (the social loss function, the central bank long-run and short-run loss functions) and monetary policy rules imply a complete regime for optimal policy making. The central bank long-run and short-run loss functions that produce the optimal policy with discretion differ from the social loss function. Moreover, the optimal policy rule emerges from the optimization of these different central bank loss functions.

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File URL: http://www.econ.uconn.edu/working/2007-19.pdf
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Bibliographic Info

Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2007-19.

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Length: 42 pages
Date of creation: Mar 2007
Date of revision:
Publication status: Published in Economic Modelling, May 2010.
Handle: RePEc:uct:uconnp:2007-19

Note: Professor Yuan gratefully acknowledges financial support from the National Social Science Foundation of China and the China Scholarship Council.
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Postal: University of Connecticut 341 Mansfield Road, Unit 1063 Storrs, CT 06269-1063
Phone: (860) 486-4889
Fax: (860) 486-4463
Web page: http://www.econ.uconn.edu/
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Keywords: Optimal Policy; Central Bank Loss Functions; Policy Rules;

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References

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Cited by:
  1. Huiping Yuan & Stephen M. Miller, 2011. "The Optimality and Controllability of Discretionary Monetary Policy," Working papers 2011-17, University of Connecticut, Department of Economics.

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