IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Efficiency and Stability Issues in Monetary Policy

  • Jangryoul Kim
Registered author(s):

    This paper quantitatively evaluates the relative importance of the efficiency and stabilization effects of monetary policy. While maximum efficiency in the spirit of Friedman advocates long-run deflation so that the nominal interest rate is zero, business cycle consideration requires positive long-run inflation so that the nominal interest rate can be adjusted for stabilization without encountering the zero bound. In an estimated DSGE model for the US economy that can generate both effects, we find that the welfare-maximizing monetary policy rule is characterized with a steady-state inflation rate of 0.12% per annum, significantly above the rate required for maximal efficiency and significantly below what is believed to have been targeted by the Federal Reserve. It is also found that, if the monetary authority tries to minimize typical loss functions comprising volatilities of macro variables such as output and inflation, the resultant policy rules are flawed: they lead to too high long-run inflation and too much policy activism, compared to rules that maximize welfare.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.tandfonline.com/doi/abs/10.1080/1226508X.2010.533851
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Taylor & Francis Journals in its journal Global Economic Review.

    Volume (Year): 39 (2010)
    Issue (Month): 4 ()
    Pages: 405-430

    as
    in new window

    Handle: RePEc:taf:glecrv:v:39:y:2010:i:4:p:405-430
    Contact details of provider: Web page: http://www.tandfonline.com/RGER20

    Order Information: Web: http://www.tandfonline.com/pricing/journal/RGER20

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:taf:glecrv:v:39:y:2010:i:4:p:405-430. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.