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Optimal Operational Monetary Policy Rules in an Endogenous Growth Model: a calibrated analysis

  • Hiroki Arato


    (Japan Society for the Promotion of Science and Graduate School of Economics, Kyoto University)

This paper constructs an endogenous growth New Keynesian model and considers growth and welfare effect of Taylor-type (operational) monetary policy rules. The Ramsey equilibrium and optimal operational monetary policy rule is also computed. In the calibrated model, the Ramseyoptimal volatility of inflation rate is smaller than that in standard exogenous growth New Keynesian model with physical capital accumulation. Optimal operational monetary policy rule makes nominal interest rate respond strongly to inflation and mutely to real activity, as in standard New Keynesian model. Growth-maximizing operational monetary policy is not identical to optimal operational monetary policy. Welfare cost of responding to real activity is two or three times larger than that of exogenous growth New Keynesian model.

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Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 663.

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Length: 26pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:kyo:wpaper:663
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