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A General Schema for Optimal Monetary Policymaking: Objectives and Rules

  • Huiping Yuan

    (Xiamen University)

  • Stephen M. Miller

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

This paper examines four equivalent methods of optimal monetary policymaking, committing to the social loss function, using discretion with the central bank long-run and short-run loss functions, and following monetary policy rules. All lead to optimal economic performance. The same performance emerges from these different policymaking methods because the central bank actually follows the same (similar) policy rules. These objectives (the social loss function, the central bank long-run and short-run loss functions) and monetary policy rules imply a complete regime for optimal policy making. The central bank long-run and short-run loss functions that produce the optimal policy with discretion differ from the social loss function. Moreover, the optimal policy rule emerges from the optimization of these different central bank loss functions.

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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2007-19.

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Length: 42 pages
Date of creation: Mar 2007
Date of revision:
Publication status: Published in Economic Modelling, May 2010.
Handle: RePEc:uct:uconnp:2007-19
Note: Professor Yuan gratefully acknowledges financial support from the National Social Science Foundation of China and the China Scholarship Council.
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