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Transmission lags and optimal monetary policy

  • Kilponen, Juha
  • Leitemo, Kai

The credibility problems of monetary policy are enlarged by transmission lags whenever the welfare criterion consists of arguments with differing transmission lags. If, as usually argued, prices react to monetary policy with a longer lag than output, the discretionary bias is substantially increased under a consumer welfare maximizing policy criterion (flexible inflation targeting) in the prototype New Keynesian model. Money growth targeting can significantly reduce the discretionary bias, but is not robust to other specifications of welfare with higher valuation of output stability.

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

Volume (Year): 35 (2011)
Issue (Month): 4 (April)
Pages: 565-578

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:4:p:565-578
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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