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The Making of Optimal and Consistent Policy: An Analytical Framework for Monetary Models

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  • Huiping Yuan

    (Xiamen University)

  • Stephen M. Miller

    (University of Connecticut and University of Nevada, Las Vegas)

  • Langnan Chen

    (Sun Yat-sen University)

Abstract

This paper shows that optimal policy and consistent policy outcomes require the use of control-theory and game-theory solution techniques. While optimal policy and consistent policy often produce different outcomes even in a one-period model, we analyze consistent policy and its outcome in a simple model, finding that the cause of the inconsistency with optimal policy traces to inconsistent targets in the social loss function. Control theory can identify the optimal plan and, thus, the optimal economic outcomes. Then, we can seek a consistent plan that coincides with the optimal plan through institutional design. That is, the optimal plan can indicate how to design the optimal institution, through which we implement the optimal plan with a consistent plan.

Suggested Citation

  • Huiping Yuan & Stephen M. Miller & Langnan Chen, 2006. "The Making of Optimal and Consistent Policy: An Analytical Framework for Monetary Models," Working papers 2006-05, University of Connecticut, Department of Economics, revised Jan 2009.
  • Handle: RePEc:uct:uconnp:2006-05
    Note: We presented an earlier version at Federal Reserve Bank of San Francisco. We thank Richard Dennis, Mark Spiegel, and Tao Wu for helpful comments and assistance.
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    Cited by:

    1. Stephen M. Miller & Huiping Yuan, 2005. "Consistent Targets and Optimal Monetary Policy: Conservative Central Banker Redux," Working papers 2005-55, University of Connecticut, Department of Economics, revised Jan 2009.
    2. Huiping Yuan & Stephen M. Miller, 2006. "The Making of Optimal and Consistent Policy: An Implementation Theory Framework for Monetary Policy," Working papers 2006-06, University of Connecticut, Department of Economics, revised Jan 2009.
    3. Derakhshani Darabi , Kaveh & Jafari Samimi , Ahmad, 2016. "Central Bank Independence and Central Bank Conservatism: Theory with an Application to Iran," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 11(1), pages 15-30, January.
    4. Huiping Yuan & Stephen M. Miller, 2013. "Target Controllability and Time Consistency: Complement to the Tinbergen Rule," Working papers 2013-35, University of Connecticut, Department of Economics.
    5. Huiping Yuan & Stephen M. Miller, 2011. "The Optimality and Controllability of Discretionary Monetary Policy," Working papers 2011-17, University of Connecticut, Department of Economics.

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    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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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