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Optimal Monetary Policy Inertia

  • Woodford, Michael

    (Princeton University)

The first section of this paper presents a model of the economy and poses the problem of optimal monetary policy. The second characterizes the responses of endogenous variables, including nominal interest rates, to shocks under an optimal regime, and highlights the advantages of commitment, by contrasting the optimal responses with those that would result from optimization under discrestion. Then, the next section considers the optimal assignment of an objective to a central bank with instrument but not goal) independence, that is expected to pursue its assigned goal under discretion. The last section considers the form of interest rate feedback rule that can achieve the desired dynamic responses to chocks, if the central bank's commitment to such a rule is credible. to the private sector.

(This abstract was borrowed from another version of this item.)

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Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 666.

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Length: 112 pages
Date of creation: 03 Nov 2000
Date of revision:
Handle: RePEc:hhs:iiessp:0666
Note: A later version of the paper is also available as NBER working paper no. 7261, July 1999, and at the author's web page at www.princeton.edu/~woodford.
Contact details of provider: Postal: Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden
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  7. Woodford, Michael, 1990. "The optimum quantity of money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 20, pages 1067-1152 Elsevier.
  8. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
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  10. Andrew Levin & Volker Wieland & John C. Williams, 1998. "Robustness of simple monetary policy rules under model uncertainty," Finance and Economics Discussion Series 1998-45, Board of Governors of the Federal Reserve System (U.S.).
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  26. Svensson, Lars E.O., 1997. "Price Level Targeting vs. Inflation Targeting: A Free Lunch?," Seminar Papers 614, Stockholm University, Institute for International Economic Studies.
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