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Forward-looking behavior and optimal discretionary monetary policy

Listed author(s):
  • Lansing, Kevin J.
  • Trehan, Bharat

This paper derives a closed-form solution for the optimal discretionary monetary policy in a small macroeconomic model that allows for varying degrees of forward-looking behavior. We show that a more forward-looking aggregate demand equation serves to attenuate the response to inflation and the output gap in the optimal interest rate rule. In contrast, a more forward-looking real interest rate equation serves to magnify the response to both variables. A more forward-looking Phillips curve serves to attenuate the response to inflation but magnifies the response to the output gap. ; Original title: Forward-looking behavior and the optimality of the Taylor rule.

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File URL: http://www.sciencedirect.com/science/article/pii/S0165-1765(03)00187-3
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Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 81 (2003)
Issue (Month): 2 (November)
Pages: 249-256

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Handle: RePEc:eee:ecolet:v:81:y:2003:i:2:p:249-256
Contact details of provider: Web page: http://www.elsevier.com/locate/ecolet

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