“Satisficing” Viable Solutions to a Monetary Policy Problem
نویسنده
چکیده
Computing the optimal trajectory over time of key economic variables is a standard exercise in the analysis of many macroeconomic systems. In practice, however, it is may be enough to ensure that these variables evolve within certain bounds rather than optimally. In this paper we study the problem of setting monetary policy in a “good enough” or satisficing sense, rather than in the optimising sense more common in the literature. Important advantages of our approach over policy optimisation include greater robustness to model, parameter, and shock uncertainty, and an adequate characterisation of otherwise imprecisely defined monetary policy goals. Our analysis frames the monetary policy problem in the context of mathematical viability theory, which rigorously captures the notion of satisficing. A solution to a viability problem is a set of initial conditions for the system, for which there exist strategies that maintain the system within a desired state domain. We estimate a simple small open economy model on New Zealand data and use viability theory to discuss the possibility of maintaining inflation, output, and interest rate within some acceptable bounds. We derive interest rate rules that achieve such an outcome endogenously.
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Viable Solutions to an Open Economy Monetary Policy Problem
In Krawczyk and Kim (Macroeconomics, 2009), we studied the problem of setting monetary policy in a closed economy using viability theory. Policies derived from the application of viability theory are ‘good enough’, rather than ‘optimal’. In this paper, we extend the analysis to a small open-economy model where the exchange rate becomes an additional channel for the transmission of monetary poli...
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