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Optimal monetary policy in the generalized Taylor economy

  • Kara, Engin

In this paper, we use the generalized Taylor economy (GTE) framework to examine the optimal choice of inflation index. In this otherwise standard dynamic stochastic general equilibrium (DSGE) model, there can be many sectors, each with a different contract length. In the GTE framework with an empirically relevant contract structure, a simple rule under which the interest rate responds to economy-wide inflation gives a welfare outcome nearly identical to the optimal policy. This finding suggests that it may not be necessary for a well-designed monetary policy to respond to sector-specific inflations.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 10 (October)
Pages: 2023-2037

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:10:p:2023-2037
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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