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Trend growth and optimal monetary policy

  • Mattesini, Fabrizio
  • Nisticò, Salvatore

This paper analyzes the optimal behavior of the Central Bank in an economy characterized by balanced growth. We show how trend-growth affects the dynamics of inflation, the preferences of a welfare-maximizing Central Bank and optimal monetary policy. In particular, we show that the optimal monetary policy response to cost-push shocks is not invariant to trend growth, and that countries with lower trend growth have substantially higher incentives to commit to simple rules, both from a welfare and price-stability perspectives.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 32 (2010)
Issue (Month): 3 (September)
Pages: 797-815

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Handle: RePEc:eee:jmacro:v:32:y:2010:i:3:p:797-815
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