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Speed Limit Policies: The Output Gap and Optimal Monetary Policy

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  • Carl Walsh

Abstract

In a standard New Keynesian model, a myopic central bank concerned with stabilizing inflation and changes in the output gap will implement a policy under discretion that replicates the optimal, timeless perspective, precommitment policy. By stabilizing output gap changes, the central bank imparts inertia into output and inflation that is absent under pure discretion. Even a fully optimizing (i.e., non-myopic) central bank operating in a discretionary policy environment achieves better social outcomes if it focuses on inflation and changes in the output gap than are achieved under inflation targeting.

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  • Carl Walsh, 2001. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," CESifo Working Paper Series 609, CESifo.
  • Handle: RePEc:ces:ceswps:_609
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Paolo Surico, 2002. "Inflation Targeting and Nonlinear Policy Rules: the Case of Asymmetric Preferences," Macroeconomics 0210002, University Library of Munich, Germany, revised 23 Feb 2004.
    2. Lansing, Kevin J. & Trehan, Bharat, 2003. "Forward-looking behavior and optimal discretionary monetary policy," Economics Letters, Elsevier, vol. 81(2), pages 249-256, November.
    3. Athanasios Orphanides & John C. Williams, 2002. "Robust Monetary Policy Rules with Unknown Natural Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 63-146.
    4. Jean-Paul Lam & William Scarth, 2002. "Alternative Public Spending Rules and Output Volatility," Staff Working Papers 02-37, Bank of Canada.
    5. Richard Dennis, 2008. "Timeless perspective policymaking: When is discretion superior?," Working Paper Series 2008-21, Federal Reserve Bank of San Francisco, revised 2008.
    6. Jensen, Christian & McCallum, Bennett T., 2002. "The non-optimality of proposed monetary policy rules under timeless perspective commitment," Economics Letters, Elsevier, vol. 77(2), pages 163-168, October.
    7. Carl E. Walsh, 2002. "When should central bankers be fired?," Economics of Governance, Springer, vol. 3(1), pages 1-21, March.
    8. Edward Nelson, 2007. "The Great Inflation and Early Disinflation in Japan and Germany," International Journal of Central Banking, International Journal of Central Banking, vol. 3(4), pages 23-76, December.
    9. Mayes, David & Virén, Matti, 2004. "Asymmetries in the Euro area economy," Research Discussion Papers 9/2004, Bank of Finland.
    10. Kirdan Lees, 2003. "The stabilisation problem: the case of New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2003/08, Reserve Bank of New Zealand.
    11. Carl E. Walsh, 2003. "Minding the speed limit," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue may30.
    12. Richard Dennis, 2006. "The frequency of price adjustment and New Keynesian business cycle dynamics," Working Paper Series 2006-22, Federal Reserve Bank of San Francisco, revised 2006.
    13. Mash, Richard, 2002. "New Keynesian Microfoundations Revisited: A Generalised Calvo-Taylor Model and the Desirability of Inflation vs. Price Level Targeting," Royal Economic Society Annual Conference 2002 138, Royal Economic Society.
    14. Mash, Richard, 2002. "Monetary Policy with an Endogenous Capital Stock When Inflation Is Persistent," Manchester School, University of Manchester, vol. 70(0), pages 55-86, Supplemen.
    15. Piero Ferri & Anna Maria Variato, 2007. "Endogenous Cycles, Debt and Monetary Policy," Working Papers (-2012) 0703, University of Bergamo, Department of Economics.
    16. Carl Walsh, 2007. "Inflation Targeting and the Role of Real Objectives," Research and Policy Notes 2007/02, Czech National Bank.

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