Active and Passive Monetary Policy in an Overlapping Generations Model

In a standard overlapping generations model, active monetary policy reinforces mechanisms that lead to equilibrium indeterminacy and to countercyclical behavior of young-age consumption. The policy rule which minimizes inflation volatility can be active or passive, depending on the characteristics of shocks and the risk aversion of households. Inflation forecast errors are always greater under active inflation forecast targeting than under passive inflation forecast targeting or strict money growth targeting. Indeterminacy is more likely under an active forwardlooking rule than under the corresponding backward-looking rule, but backward-looking rules can render the monetary steady state unstable. (Copyright: Elsevier)