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Forward-looking behavior and optimal discretionary monetary policy

Listed author(s):
  • Kevin J. Lansing
  • Bharat Trehan

This paper derives a closed-form solution for the optimal discretionary monetary policy in a small macroeconomic model that allows for varying degrees of forward-looking behavior. We show that a more forward-looking aggregate demand equation serves to attenuate the response to inflation and the output gap in the optimal interest rate rule. In contrast, a more forward-looking real interest rate equation serves to magnify the response to both variables. A more forward-looking Phillips curve serves to attenuate the response to inflation but magnifies the response to the output gap. ; Original title: Forward-looking behavior and the optimality of the Taylor rule.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2001-03.

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Date of creation: 2003
Handle: RePEc:fip:fedfwp:2001-03
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