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Optimal monetary policy responses and welfare analysis within the highfrequency New-Keynesian framework

  • Sacht, Stephen

In this we investigate the welfare effects of optimal monetary policy measurements within a high-frequency New-Keynesian model i.e. under variation of the period length. Our results indicate that the policy maker faces a higher welfare loss on a higher relative to a lower frequency of the agents' decision making. While overall inertia in the model increases, we show that the more the pass-through of output gap movements into inflation rate dynamics is dampened on a higher frequency, this amplifies the trade-off of the central bank in case of a cost-push shock. This is caused by the impact of so-called frequency-dependent persistence effects, which mimic the impact of the increase in the amount of market days on the dynamics of the model. This result is less severe in the optimal monetary policy regime under Commitment because of a time-invariant history dependence effect with respect to the period length.

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Paper provided by Christian-Albrechts-University of Kiel, Department of Economics in its series Economics Working Papers with number 2014-03.

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Date of creation: 2014
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Handle: RePEc:zbw:cauewp:201403
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  1. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2003. "Optimal Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 825-860.
  2. Assenmacher-Wesche, Katrin & Gerlach, Stefan, 2008. "Interpreting euro area inflation at high and low frequencies," European Economic Review, Elsevier, vol. 52(6), pages 964-986, August.
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  4. Franke, Reiner & Sacht, Stephen, 2010. "Some observations in the high-frequency versions of a standard New-Keynesian model," MPRA Paper 33358, University Library of Munich, Germany, revised Jun 2011.
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  6. Sacht, Stephen, 2014. "Analysis of Various Shocks within the High-Frequency Versions of the Baseline New-Keynesian Model," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100372, Verein für Socialpolitik / German Economic Association.
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  8. Wohltmann, Hans-Werner & Winkler, Roland C., 2008. "Anticipated and unanticipated oil price shocks and optimal monetary policy," Economics Working Papers 2008,05, Christian-Albrechts-University of Kiel, Department of Economics.
  9. Luis J. Álvarez & Emmanuel Dhyne & Marco M. Hoeberichts & Claudia Kwapil & Hervé le Bihan & Patrick Lünnemann & Fernando Martins & Roberto Sabbatini & Harald Stahl & Philip Vermeulen & Jouko Vilmunen, 2005. "Sticky prices in the euro area: a summary of new micro evidence," Banco de Espa�a Working Papers 0542, Banco de Espa�a.
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  14. Svensson, Lars E O, 1998. "Inflation Targeting as a Monetary Policy Rule," CEPR Discussion Papers 1998, C.E.P.R. Discussion Papers.
  15. Jordi Galí & Frank Smets & Rafael Wouters, 2012. "Slow Recoveries: A Structural Interpretation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 9-30, December.
  16. Richard Dennis, 2001. "Optimal policy in rational-expectations models: new solution algorithms," Working Paper Series 2001-09, Federal Reserve Bank of San Francisco.
  17. Leitemo, Kai, 2008. "Inflation-targeting rules: History-dependent or forward-looking?," Economics Letters, Elsevier, vol. 100(2), pages 267-270, August.
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