Supply Shocks and Optimal Monetary Policy
This paper demonstrates that if current shocks are observed instantaneously, output can be stabilized perfectly for completely general supply disturbances, using simple monetary rules based only on: (i) the current shock, (ii) the previous forecast of the current shock, (iii) the forecast for just one period ahead. The optimal rule can be expressed in an infinite number of ways and various alternatives are considered. With optimal wage indexation, the monetary rule is even simpler. If current shocks are not observed instantaneously, but are inferred from other signals, the optimal rules are of the same form, with the current perceived disturbance replacing the actual.
|Date of creation:||Jul 1986|
|Date of revision:|
|Publication status:||published as Turnovsky, Stephen J. "Supply Shocks and Optimal Monetary Policy," Oxford Economic Papers, Vol. 39, No. 1, March 1987, pp. 20-37.|
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- Aizenman, Joshua & Frenkel, Jacob A, 1986.
"Supply Shocks, Wage Indexation and Monetary Accommodation,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 18(3), pages 304-22, August.
- Joshua Aizenman & Jacob A. Frenkel, 1985. "Supply Shocks, Wage Indexation and Monetary Accommodation," NBER Working Papers 1609, National Bureau of Economic Research, Inc.
- Aizenman, Joshua & Frenkel, Jacob A, 1985.
"Optimal Wage Indexation, Foreign Exchange Intervention, and Monetary Policy,"
American Economic Review,
American Economic Association, vol. 75(3), pages 402-23, June.
- Joshua Aizenman & Jacob A. Frenkel, 1984. "Optimal Wage Indexation, Foreign-Exchange Intervention and Monetary Policy," NBER Working Papers 1329, National Bureau of Economic Research, Inc.
- Alan S. Blinder, 1980.
"Monetary Accommodation of Supply Shocks under Rational Expectations,"
NBER Working Papers
0464, National Bureau of Economic Research, Inc.
- Blinder, Alan S, 1981. "Monetary Accommodation of Supply Shocks under Rational Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 13(4), pages 425-38, November.
- Gordon, Robert J, 1984.
"Supply Shocks and Monetary Policy Revisited,"
American Economic Review,
American Economic Association, vol. 74(2), pages 38-43, May.
- Robert J. Gordon, 1975. "Alternative Responses of Policy to External Supply Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(1), pages 183-206.
- Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
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