scholarly journals Optimal Monetary Policy with Staggered Wage and Price Contracts

2019 ◽  
Vol 52 (4) ◽  
pp. 537-572
Author(s):  
Christopher J. Erceg ◽  
Dale W. Henderson ◽  
Andrew T. Levin
Keyword(s):  
Monetary Policy ◽  
Inflation Targeting ◽  
Monopolistic Competition ◽  
Jel Classification ◽  
Output Gap ◽  
Optimal Monetary Policy ◽  
Price Inflation ◽  
Agent Model ◽  
Welfare Losses ◽  
Wage Inflation

Abstract We formulate an optimizing-agent model in which both labor and product markets exhibit monopolistic competition and staggered nominal contracts. The unconditional expectation of average household utility can be expressed in terms of the unconditional variances of the output gap, price inflation, and wage inflation. Monetary policy cannot achieve the Pareto-optimal equilibrium that would occur under completely flexible ­wages and prices; that is, the model exhibits a tradeoff in stabilizing the output gap, price inflation, and wage inflation. We characterize the optimal policy rule for reasonable calibrations of the model. We also find that strict price inflation targeting generates relatively large welfare losses, whereas several other simple policy rules perform nearly as well as the optimal rule. JEL Classification: E31; E32; E52

scholarly journals Optimal Monetary Policy Under Bounded Rationality

2019 ◽  
Vol 19 (166) ◽  
Author(s):  
Jonathan Benchimol ◽  
Lahcen Bounader
Keyword(s):  
Monetary Policy ◽  
Bounded Rationality ◽  
Optimal Policy ◽  
Inflation Targeting ◽  
Price Level ◽  
Inflation Expectations ◽  
Optimal Monetary Policy ◽  
Policy Regime ◽  
Welfare Losses ◽  
Simple Rules

The form of bounded rationality characterizing the representative agent is key in the choice of the optimal monetary policy regime. While inflation targeting prevails for myopia that distorts agents' inflation expectations, price level targeting emerges as the optimal policy under myopia regarding the output gap, revenue, or interest rate. To the extent that bygones are not bygones under price level targeting, rational inflation expectations is a minimal condition for optimality in a behavioral world. Instrument rules implementation of this optimal policy is shown to be infeasible, questioning the ability of simple rules à la Taylor (1993) to assist the conduct of monetary policy. Bounded rationality is not necessarily associated with welfare losses.

OPTIMAL MONETARY POLICY FOR THE EMU ACCESSION COUNTRIES. A NEW KEYNESIAN APPROACH

2014 ◽  
Vol 19 (7) ◽  
pp. 1427-1475 ◽  
Author(s):  
Anna Lipińska
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Optimal Policy ◽  
Nominal Exchange Rate ◽  
Nominal Interest Rate ◽  
Output Gap ◽  
Optimal Monetary Policy ◽  
Accession Countries ◽  
Dynamic Stochastic ◽  
Maastricht Criteria

This paper uses a dynamic stochastic general equilibrium model of a two-sector small open economy to analyze how the Maastricht criteria modify a fully credible optimal monetary policy in the Economic and Monetary Union accession countries. We show that if the country is not constrained by the criteria, optimal policy should stabilize fluctuations in PPI inflation, in the aggregate output gap, and in the domestic and international terms of trade. The optimal policy constrained permanently by the Maastricht criteria is characterized by reduced variability of the nominal exchange rate, CPI inflation, and the nominal interest rate and by lower optimal targets for CPI inflation and nominal interest rate. This policy results in higher variability and nonzero means for both PPI inflation and output gap, thus leading to additional, but small, welfare costs compared with the unconstrained policy.

scholarly journals The Monetary Policy of the National Bank of Romania in The Inflation Targeting Era. A Taylor Rule Approach

2015 ◽  
Vol 8 (2) ◽  
pp. 91-102
Author(s):  
Bogdan Căpraru ◽  
Norel Ionuţ Moise ◽  
Andrei Rădulescu
Keyword(s):  
Monetary Policy ◽  
Financial Stability ◽  
Inflation Targeting ◽  
Taylor Rule ◽  
Output Gap ◽  
Inflation Differential ◽  
Rule Approach ◽  
National Bank ◽  
Potential Gdp ◽  
The One

AbstractIn this paper we analyse the monetary policy of the National Bank of Romania during 2005-2015 by estimating the Taylor rule, on a quarterly basis. We determined the potential GDP by employing the Hodrick-Prescott filter, in order to distinguish between the cyclical and the structural components of the output. Then, we estimated the traditional Taylor rule function (with a classic OLS regression), but slightly modified, as to take into account the forward-looking attitude of the NBR. The results confirm the direct correlation between the monetary policy rate and the output gap on the one hand, and the inflation differential (inflation - inflationtarget) on the other hand. Also, the results show us that NBR paid a higher attention to the dynamics of the inflation versus its target than to the output gap. Last, but not least, the central bank has been also sensitive to the financial stability, as reflected by the results of the incorporation of the ROBOR-EURIBOR spread in the classical Taylor rule.

scholarly journals Monetary Policy Rules in Emerging ASEAN Economies

2021 ◽  
Vol 12 (3) ◽  
pp. 255-274
Author(s):  
Mesa Wanasilp
Keyword(s):  
Monetary Policy ◽  
Method Of Moments ◽  
Inflation Targeting ◽  
Generalized Method Of Moments ◽  
The Philippines ◽  
Policy Implications ◽  
Output Gap ◽  
Policy Rules ◽  
Monetary Policy Rules ◽  
The Difference

This paper examines the monetary policy rules for five emerging ASEAN economies—Indonesia, the Philippines, and Thailand as the adopters of inflation targeting (IT) and Malaysia and Vietnam as the non-IT adopters. For the methodology, this study applies a generalized method of moments that provides a consistent and efficient estimator for the estimation that contains endogenously determined variables. The questions are whether the rules of the IT adopters have fulfilled the Taylor principle and what has been the difference in the rules between the IT adopters and the non-IT adopters. The main findings are as follows: Regarding the IT adopters, their rules are characterized by inflation-responsive rules fulfilling the Taylor principle. As for the non-IT adopters, Malaysia follows solely an output-gap responsive rule, and Vietnam exhibits the mixed rules. The policy implications are that for the IT adopters there might be room to make their policy-rate responses more elastic to inflation, and that for the non-IT adopters, there would be a need to adopt an explicit IT framework.

scholarly journals The Analysis of Monetary Transmission Mechaniscm by Expectation Patterns in Influencing the Inflation

2018 ◽  
Vol 6 (4) ◽  
pp. 412-419
Author(s):  
Ilma Ulfatul
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Inflation Targeting ◽  
Transmission Mechanism ◽  
Output Gap ◽  
Inflation Expectations ◽  
Short Term ◽  
Inflation Expectation ◽  
Policy Transmission ◽  
Monetary Policy Transmission Mechanism

Bank Indonesia set inflation targeting framework from 1 July 2005 by publicizing the inflation target or forward inflation to the public. However, the phenomenon show that most of the actual inflation of Indonesia is not in accordance with inflation targeting that have been set by Bank Indonesia. The purpose of this research is to analyze and know the flow of monetary policy transmission mechanism of expectation line in influencing inflation, to analyze and to know the influence of long-term and short-term and the shocks of interest rate, exchange rate, inflation expectations, output gap and GDP on inflation in Indonesia. The variables used in this research are BI Rate, Exchange Rate, Inflation Expectation, Output Gap, GDP and Inflation. The data used in this research is monthly data of time series from January 2006 until June 2016 which come from Bank Indonesia (BI) and Central Statistic Agency (BPS). The method used in this research is Vector Error Correction Model (VECM). The result of research indicates that: The flow of monetary policy transmission mechanism of expectation line in influencing inflation in Indonesia runs continuously with indicated the existence of two-way relationship between exchange rate and inflation variable, in the short term, the BI Rate, Exchange Rate and Output Gap are significant and positively affect inflation, inflation expectation variables are significant and affect inflation and GDP variable is insignificant to inflation in Indonesia, while in long run variable affecting inflation rate are BI Rate and inflation expectations, based on the variance decomposits result shows that the biggest variant contributing to inflation in Indonesia is the BI Rate.

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.

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