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Conditional Welfare Comparisons of Monetary Policy Rules

Author

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  • Andy Levin
  • Jinill Kim

Abstract

Various approaches to optimal monetary policy have been used to select time-invariant policy rules, including the timeless perspective approach by Woodford (1999) and the unconditional expected utility criterion of McCallum (2000). In this paper, we argue instead that policy rules should be evaluated in terms of the household’s conditional welfare at the time of adoption, integrated over the ergodic distribution of initial conditions generated by the previous policy. Thus, the performance of time-invariant rules can be compared against the benchmark value achieved by the Ramsey solution, while ensuring that the coefficients of the rule are not fine-tuned to specific values of the initial conditions. Finally, using the benchmark new Keynesian model, we consider the case when the initial conditions are generated by optimal policy under discretion, and show that the optimal time-invariant rule yields conditional welfare superior to that of the rules previously proposed in the lite

Suggested Citation

  • Andy Levin & Jinill Kim, 2004. "Conditional Welfare Comparisons of Monetary Policy Rules," Econometric Society 2004 Far Eastern Meetings 667, Econometric Society.
  • Handle: RePEc:ecm:feam04:667
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    Cited by:

    1. Faia, Ester, 2008. "Optimal monetary policy rules with labor market frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 32(5), pages 1600-1621, May.
    2. Nicolas Million, 2010. "Test simultané de la non-stationnarité et de la non-linéarité : une application au taux d’intérêt réel américain," Économie et Prévision, Programme National Persée, vol. 192(1), pages 83-95.
    3. Sauer, Stephan, 2007. "Discretion rather than rules? When is discretionary policy-making better than the timeless perspective?," Working Paper Series 717, European Central Bank.
    4. Ester Faia, 2011. "Macroeconomic and welfare implications of financial globalization," Journal of Applied Economics, Universidad del CEMA, vol. 14, pages 119-144, May.
    5. Faia, Ester, 2009. "Ramsey monetary policy with labor market frictions," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 570-581, May.

    More about this item

    Keywords

    monetary policy rules; time invariant rules; timeless perspective; conditional welfare;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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