IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Optimal Simple Nonlinear Rules for Monetary Policy in a New-Keynesian Model

Listed author(s):
  • Paolo Zagaglia


    (Department of Economics Stockholm University)

  • Massimiliano Marzo

    (University of Bologna)

  • Ingvar Strid

    (Stockholm School of Economics)

We study the role of nonlinear simple rules for monetary policy. We depart from the standard rules proposed by Taylor (1993), and consider a nonlinear rule for the so-called opportunistic approach to disinflation originally proposed by Orphanides and Wilcox (2002) and Aksoy, Orphanides, Small, Wieland, and Wilcox (2002). We set out a model economy with capital accumulation and nominal and real rigidities. Households have weakly-separable preferences along the lines of Chari, Kehoe, and McGrattan (2000). The public sector is modeled as a simple rule for lump-sum taxes like in Leeper (1991). We include three sources of exogenous fluctuations in the form of stochastic shocks to productivity, firms’ markup and government spending. We solve the model through the second-order Taylor approach developed by Schmitt-Grohé and Uribe (2004), and maximize a measure of conditional consumer welfare. Our microfounded model represents an improvement over the framework used by Aksoy, Orphanides, Small, Wieland, and Wilcox (2002). Our results support the view that optimal opportunistic monetary policy involves a strong anti-inflationary stance outside the zone of policy inaction, indicating that a large degree of nonlinearity can be desirable from a welfare perspective. We also compare the quantitative and qualitative properties of the model economy under the optimal nonlinear rule with those arising from optimized linear rules.

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
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.

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 392.

in new window

Date of creation: 04 Jul 2006
Handle: RePEc:sce:scecfa:392
Contact details of provider: Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:sce:scecfa:392. 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 you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.