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Satisficing Solutions for New Zealand Monetary Policy



Computing the optimal trajectory over time of key variables is a standard exercise in decision-making and the analysis of many dynamic systems. In practice however, it is often enough to ensure that these variables evolve within certain bounds. In this paper we study the problem of setting monetary policy in a `good enough' sense, rather than in the optimising sense more common in the literature. Important advantages of our satisficing approach over policy optimisation include greater robustness to model, parameter, and shock uncertainty, and a better characterisation of imprecisely defined monetary policy goals. Also, optimisation may be unsuitable for determining prescriptive policy in that it suggests a unique 'best' solution while many solutions may be satisficing. Our analysis frames the monetary policy problem in the context of viability theory which rigorously captures the notion of satisficing. We estimate a simple closed economy model on New Zealand data and use viability theory to discuss how inflation, output, and interest rate may be maintained within some acceptable bounds. We derive monetary policy rules that achieve such an outcome endogenously.

Suggested Citation

  • Jacek Krawczyk & Rishab Sethi, 2007. "Satisficing Solutions for New Zealand Monetary Policy," Reserve Bank of New Zealand Discussion Paper Series DP2007/03, Reserve Bank of New Zealand.
  • Handle: RePEc:nzb:nzbdps:2007/03

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    References listed on IDEAS

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    Cited by:

    1. Krawczyk, Jacek B & Pharo, Alastair & Simpson, Mark, 2011. "Approximations to viability kernels for sustainable macroeconomic policies," Working Paper Series 1531, Victoria University of Wellington, School of Economics and Finance.
    2. Krawczyk, Jacek B. & Serea, Oana-Silvia, 2007. "A viability theory approach to a two-stage optimal control problem," MPRA Paper 10103, University Library of Munich, Germany.
    3. Krawczyk, Jacek B & Townsend, Wilbur, 2015. "Viability of an economy with constrained inequality," Working Paper Series 4689, Victoria University of Wellington, School of Economics and Finance.
    4. Krawczyk, Jacek B & Pharo, Alastair S, 2011. "Manual of VIKAASA: An application capable of computing and graphing viability kernels for simple viability problems," Working Paper Series 1878, Victoria University of Wellington, School of Economics and Finance.
    5. Nguyen, Luan, 2016. "Should the Reserve Bank worry about the exchange rate?," MPRA Paper 75519, University Library of Munich, Germany.
    6. Jacek Krawczyk & Kunhong Kim, 2014. "Viable Stabilising Non-Taylor Monetary Policies for an Open Economy," Computational Economics, Springer;Society for Computational Economics, vol. 43(2), pages 233-268, February.
    7. Krawczyk, Jacek B. & Judd, Kenneth L., 2014. "Which economic states are sustainable under a slightly constrained tax-rate adjustment policy," MPRA Paper 59027, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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