Output hysteresis and optimal monetary policy

The Output Gap and Optimal Monetary Policy

In a standard New Keynesian model, a discretionary and myopic central bank concerned with changes in the output gap and inßation will implement a monetary policy that replicates the optimal, timeless perspective, precommitment policy. By stabilizing output gap changes, the central bank imparts inertia into output and inßation that is absent under pure discretion. It is shown that even a fully o...

Speed Limit Policies: The Output Gap and Optimal Monetary Policy

Recent work on the design of monetary policy reflects a general consensus on the appropriate objectives of monetary policy. As articulated by Svensson, “....there is considerable agreement among academics and central bankers that the appropriate loss function both involves stabilizing inflation around an inflation target and stabilizing the real economy, represented by the output gap” (Lars E. ...

Output Composition of Monetary Policy Transmission

This paper aims to investigate the role of each aggregate spending component in the monetary policy transmission in Indonesia. It assesses the relative strength of the role of each spending component in the monetary policy transmission. In so doing, this study employs the contribution analysis, which is calculated based on the cumulative impulse response of each component of GDP to a monetary p...

1 Optimal Monetary Policy

We re-examine optimal monetary policy when lump-sum taxes are unavailable. Under commitment, we show that, with alternative utility functions to that considered in Nicolini’s related analysis, the direction of the incentive to cheat may depend on the initial level of government debt, with low debt creating an incentive towards surprise deflation, but high debt the reverse. Under discretion, we ...

Optimal Monetary Stabilization Policy∗