How forward-looking is optimal monetary policy?
We calculate optimal monetary policy rules for several variants of a simple optimizing model of the monetary transmission mechanism with sticky prices and/or wages. We show that robustly optimal rules can be represented by interest-rate feedback rules that generalize the celebrated proposal of Taylor (1993). Optimal rules, however, require that the current interest rate operating target depend positively on the recent past level of the operating target, and its recent rate of increase, in a way that is characteristic of estimated central bank reaction functions, but not of Taylor's proposal.
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Article provided by Federal Reserve Bank of Cleveland in its journal Proceedings.
Volume (Year): (2003)
Issue (Month): ()
Pages: 1425-1483
| Handle: | RePEc:fip:fedcpr:y:2003:p:1425-1483 |
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