Optimal Monetary Policy in an Imperfect World
We compute the optimal Ramsey policy in a New Keynesian model where the steady state suffers from monopolistic and tax distortions. We show that the optimal monetary policy in this environment displays asymmetric responses to shocks to optimally inflate the economy (slightly) at times when it would be most beneficial to the representative agent to do so. We show that the ergodic mean of inflation under the optimal policy is slightly positive (not zero), that the ergodic mean of the output gap is slightly positive, and that welfare is actually higher than in a flexible-price version of the economy, because of the monetary authority's ability to slightly offset, in ergodic mean, the steady-state distortions in the economy
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
When requesting a correction, please mention this item's handle: RePEc:sce:scecf4:235. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.