Picking Up Nickels in Front of the Steamroller: A Simple and Partial Finger Exercise

Modeling Monetary Accommodation: Begin with the assumption that there is an Okun gap: a shortfall of aggregate demand producing mass unemployment. In order to fight this Okun gap, the central bank is going to lower its policy rate r and follow an accommodative monetary policy for some period of time. For simplicity, assume that the amount of time that accommodative policy will be followed is stochastic, and that the end of accommodation follows a Poisson distribution: at every moment in which accommodation is still in force, the expected duration of accommodation is a variable π, which the central bank chooses: π is the index of how accommodative it is willing to make monetary policy.