Optimal Monetary Policy

1998 ◽  
Vol 164 ◽  
pp. 100-109 ◽  
Author(s):  
Andrew P. Blake ◽  
Martin Weale ◽  
Garry Young
Keyword(s):  
Monetary Policy ◽  
Inflation Targeting ◽  
Policy Design ◽  
Policy Framework ◽  
Optimal Monetary Policy ◽  
Long Run ◽  
Short Run ◽  
The Interest Rate ◽  
Feedback Rule ◽  
Simple Feedback

In this article we propose a policy framework for inflation targeting that contains elements of both optimal and simple rules. We use a simple feedback rule for the interest rate to look after monetary policy in the long run whilst using optimal control in the short run to determine appropriate responses to shocks. The composite policy is capable of substantial welfare improvements over using a simple rule alone whilst maintaining tractability. We see the use of such a framework together with a fully specified model as a feasible approach to practical policy design.

scholarly journals Monetary Policy in the Post Keynesian Theoretical Framework

2017 ◽  
Vol 37 (1) ◽  
pp. 45-64
Author(s):  
FÁBIO HENRIQUE BITTES TERRA ◽  
PHILIP ARESTIS
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Inflation Targeting ◽  
Debt Management ◽  
Policy Framework ◽  
Original Writings ◽  
Policy Model ◽  
Original Contribution ◽  
The Interest Rate ◽  
Monetary Policy Framework

ABSTRACT The purpose of this contribution is to develop a Post Keynesian monetary policy model, presenting its goals, tools, and channels. The original contribution this paper develops, following (Keynes’s 1936, 1945) proposals, is the use of debt management as an instrument of monetary policy, along with the interest rate and regulation. Moreover, this paper draws its monetary policy model by broadly and strongly relying on Keynes’s original writings. A monetary policy model erected upon this basis relates itself directly to the Post Keynesian efforts to offer a monetary policy framework substantially different from the Inflation Targeting Regime of the New Macroeconomic Consensus.

scholarly journals Adopting Inflation Targeting in Pakistan: An Empirical Analysis

2010 ◽  
Vol 15 (2) ◽  
pp. 51-76 ◽  
Author(s):  
Nadia Saleem
Keyword(s):  
Monetary Policy ◽  
Inflation Targeting ◽  
Inflation Rate ◽  
Policy Option ◽  
Price Stability ◽  
Potential Candidate ◽  
Long Run ◽  
The Interest Rate ◽  
Nominal Anchor

The objective of this paper is to assess the conditions for inflation targeting in Pakistan. The recent inflationary surge in Pakistan calls for rethinking monetary policy afresh. This paper argues the case for inflation targeting in Pakistan as a policy option to achieve price stability. The country experienced an inflation rate of just below 10 percent during 1970-2009, which makes it a potential candidate for inflation targeting. Applying the VAR technique to data for the same period, inflation is shown to be adaptive in nature, leading us to reject the accelerationist hypothesis. The Lucas critique holds as people are found to use forward-looking models in forming expectations about inflation. The paper also sheds some light on the State Bank of Pakistan’s level of preparedness for the possibility of adopting inflation targeting, for which transparency and autonomy are prerequisites. The interest rate channel can play the role of a nominal anchor in the long run.

scholarly journals RESPON KEBIJAKAN MONETER YANG OPTIMAL DI INDONESIA: The State-Contingent Rule?

2008 ◽  
Vol 10 (4) ◽  
Author(s):  
Solikin M. Juhro
Keyword(s):  
Monetary Policy ◽  
Structural Changes ◽  
Structural Model ◽  
Vector Autoregression ◽  
Policy Response ◽  
Optimal Monetary Policy ◽  
Cointegrating Vector ◽  
Long Run ◽  
Policy Variable ◽  
Short Run

By developing a long-run macro structural model, The Structural Cointegrating Vector Autoregression (VAR), the optimality principle of monetary policy response in Indonesia is formulated. It accommodates not only long-run policy response and short-run dynamic errorcorrection mechanism, but also specific shocks emerged due to structural changes in the economy. In that context, the generated policy response basically reflects the optimal response of a “state-contingent rule”, different from common simple policy rules, such as Taylor rule and McCallum rule. This study captures several important aspects related to the implementation of “state-contingent rule” as an optimal monetary policy in Indonesia, namely: (i) the superiority of interest rate as a policy variable, or an operational target, against monetary base, (ii) the identification of monetary policy lag which is estimated averagely one-and-a half year, and (iii) the sub optimality of central bank monetary policy response, attributed by an over tight or loose policy response.JEL Classification: C32, E52Keywords: Kebijakan Moneter di Indonesia, Respon Kebijakan Moneter, Structural Cointegration Vector Autoregression(VAR).

scholarly journals Impact of Inflation Targeting Policy Framework of Countries between the Period of 2009-2019

2021 ◽  
Vol 7 (2) ◽  
Author(s):  
Ananda Rathnayake
Keyword(s):  
Economic Growth ◽  
Money Supply ◽  
Inflation Targeting ◽  
Karl Marx ◽  
Time Series Data ◽  
Negative Relationship ◽  
Policy Framework ◽  
Series Data ◽  
Long Run ◽  
Short Run

Today, many countries in the world tend to choose Inflation Targeting Monetary Policy Framework, in which context it has become a matter of debate whether inflation or economic growth is driven by monetary expansions. The common acceptance is that inflation is created by the continuous rise in the money supply which is strongly proved through the economic theories forwarded by Karl Marx, Irvin Fisher and Friedman. The main aim of the study is to examine the relationship between money supply and economic growth under a broad phenomenon by utilizing the countries with inflation targeting policies in action. The time-series data have been collected from different countries that exercise inflation targeting from 2009 to 2019 and the sample included 39 countries from all over the globe, both from developed and developing categories. The utilized Autoregressive Distribution Lag (ARDL) model forwarded the results suggesting that there is a significant negative relationship between the economic growth and money supply in the long run while no relationship has been observed in the short run.

INNOVATION, GROWTH, AND OPTIMAL MONETARY POLICY

2019 ◽  
pp. 1-24
Author(s):  
Barbara Annicchiarico ◽  
Alessandra Pelloni
Keyword(s):  
Monetary Policy ◽  
Inflation Targeting ◽  
Public Spending ◽  
New Keynesian ◽  
Positive Trend ◽  
Policy Recommendation ◽  
Optimal Monetary Policy ◽  
Keynesian Model ◽  
Trend Inflation ◽  
Short Run

This paper examines how innovation-led growth affects optimal monetary policy. We consider the Ramsey policy in a New Keynesian model where R&D leads to an expanding variety of intermediate goods and compare the results with those obtained when the expansion occurs exogenously. Positive trend inflation is found to be optimal under both assumptions, but much higher with profit-seeking innovation. Optimal monetary policy must be counter-cyclical in response to both technology and public spending shocks, yet the intensity of the reaction crucially depends on the presence of an R&D sector. However, the small amount of short-run deviations of prices from the non-zero trend inflation observed in response to shocks suggests inflation targeting as a robust policy recommendation.

scholarly journals An optimal control problem of monetary policy

2021 ◽  
Vol 26 (11) ◽  
pp. 5769
Author(s):  
Andrea Bacchiocchi ◽  
Germana Giombini
Keyword(s):  
Optimal Control ◽  
Monetary Policy ◽  
Interest Rate ◽  
Optimal Control Problem ◽  
Continuous Time ◽  
Phillips Curve ◽  
Optimal Monetary Policy ◽  
Trade Off ◽  
Long Run ◽  
The Interest Rate

<p style='text-indent:20px;'>This paper analyses an optimal monetary policy under a non-linear Phillips curve and linear GDP dynamics. A central bank controls the inflation and the GDP trends through the adjustment of the interest rate to prevent shocks and deviations from the long-run optimal targets. The optimal control path for the monetary instrument, the interest rate, is the result of a dynamic minimization problem in a continuous-time fashion. The model allows considering various economic dynamics ranging from hyperinflation to disinflation, sustained growth and recession. The outcomes provide useful monetary policy insights and reveal the dilemma between objectives faced by the monetary authority in trade-off scenarios.</p>

Revisiting Money Demand Stability in India: Some Post-reform Evidence (1996–2016)

2018 ◽  
Vol 66 (3-4) ◽  
pp. 326-346
Author(s):  
Masudul Hasan Adil ◽  
Salman Haider ◽  
Neeraj R. Hatekar
Keyword(s):  
Monetary Policy ◽  
Money Demand ◽  
Inflation Targeting ◽  
Structural Breaks ◽  
Policy Formulation ◽  
Policy Implications ◽  
Policy Framework ◽  
Reform Era ◽  
Distributed Lag ◽  
Long Run

In the evidence of the globalised world economy and changing economic structure, the traditional policies require a close examination. This is particularly true in the case of emerging economies like India, which have experienced a rapidly changing policy environment since 1991. The demand for money is an important ingredient for monetary policy formulation. Therefore, the present study re-examines the stability and specification issues of money demand in India’s post-reform era. The study takes care of structural breaks in the macroeconomic series while using a unique quarterly dataset from 1996: Q2 to 2016: Q3. Despite the structural breaks, the application of Gregory and Hansen (1996) and autoregressive distributed lag models demonstrate the existence of a stable short-and long-run relationships between real money balances and their determinants. These empirical findings are having a lot of policy implications in the current monetary policy framework of India—inflation targeting framework.

scholarly journals Credibility of the Philippine Central Bank: Evidenced by the Interest Rate Pass-Through

2017 ◽  
Vol 3 (1) ◽  
pp. 47-56
Author(s):  
Chu V. Nguyen
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Central Bank ◽  
Empirical Finding ◽  
Policy Makers ◽  
Long Run ◽  
Short Run ◽  
Pass Through ◽  
The Interest Rate

This study investigates the Philippine interest rate pass-through over the December 2001 through January 2016 period. The empirical findings suggest that the Philippine Central Bank has not been very effective in formulating and implementing its countercyclical monetary policy. Specifically, the empirical results reveal very low short-run and long- run interest rate pass-through. The Bounds test results indicate no long-term relationship between countercyclical monetary policy and market rates. Notwithstanding the banking system's remarkable performance in the recent years, amid lingering uncertainties in global financial markets, the Philippine Central Bank lacked the credibility in conducting its countercyclical monetary policy. This empirical finding may not be desirable but it forewarns the monetary policy makers of challenges in formulating and implementing their monetary policy.

scholarly journals The role of money in monetary policy design of modern central banks

2007 ◽  
Vol 59 (4) ◽  
pp. 560-578
Author(s):  
Gradimir Kozetinac
Keyword(s):  
Monetary Policy ◽  
Inflation Targeting ◽  
Policy Design ◽  
Central Banks ◽  
Policy Regime ◽  
Important Indicator ◽  
Indicator Variable ◽  
Monetary Aggregates ◽  
Long Run

This paper considers the role of money, particularly the role of monetary analysis in monetary policy-making. During the last three decades, many central banks changed their monetary policy considerably. In the late 1970s money and the long-run effects of its movements on inflation were in the center-stage of economic policy. Given the breakdown of the relationship between monetary aggregates and goal variables such as inflation, many countries in the world have recently adopted inflation targeting as their monetary policy regime. The direct control of money supply lost importance. Central bankers operate in an environment of high uncertainty regarding the functioning of the economy. In such a complex environment, a single model or a limited set of indicators is not a sufficient guide for monetary policy. Monetary aggregates continue to be an important indicator variable concludes the author.

scholarly journals Inflation Dynamics in Nigeria

2020 ◽  
pp. 61-77
Author(s):  
Ojeah Ikechukwu Augustine ◽  
Nwogwugwu C. C. Uche ◽  
N. Ozoh Joan
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Inflation Targeting ◽  
Statistical Significance ◽  
Least Square ◽  
Policy Framework ◽  
Price Stability ◽  
Bounds Testing ◽  
Single Digit ◽  
Long Run

Inflation remains a central issue to policy makers and analysts. High inflation induces uncertainty, adversely affects financial sector development and it is the goal of monetary authorities to achieve price stability in consonance with the general consensus that price stability aids growth of the economy. Despite the goal of single-digit inflation rate by monetary authority (CBN), the Nigerian economy is still practically characterized by high cost of living, increased variability of relative prices of goods and services; therefore the reliability of the monetary aggregates as the main signal for the conduct of monetary policy for control of inflation has become increasingly questionable. Against this backdrop, this research examined the determinants of dynamics of inflation in Nigeria over a period of 36 years (1982-2016); using New Keynesian Philips Curve theoretical framework, Ordinary Least Square estimation techniques (OLS), ARDL bounds testing approach to cointegration and Vector Autoregressive (VAR) econometric techniques to ascertain if inflation is only a monetary phenomenon in Nigeria having inflation as dependent variable and exchange rate (Ex), interest rate (Ir), Unemployment (U), Real Gross Domestic Product (RGDP) as independent variable. The result of the estimation shows that inflation is not only a monetary phenomenon by the statistical significance of EX and RGDP at short and long-run, U and IR at long-run. Therefore, it was thus recommended that exchange rate and inflation targeting monetary policy framework that will revalue the naira should be implemented to reduce inflation while expansionary fiscal policy that will increase RGDP is also recommended for reduction of inflation.

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