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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
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  1. Glenn Rudebusch, 2000. "Assessing Nominal Income Rules for Monetary Policy with Model and Data Uncertainty," Econometric Society World Congress 2000 Contributed Papers 0065, Econometric Society.
  2. Juha Kilponen & Kai Leitemo, 2008. "Model Uncertainty and Delegation: A Case for Friedman's "k"-Percent Money Growth Rule?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2-3), pages 547-556, 03.
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  13. Glenn D. Rudebusch, 2001. "Term structure evidence on interest rate smoothing and monetary policy inertia," Working Paper Series 2001-02, Federal Reserve Bank of San Francisco.
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