Robustly Optimal Monetary Policy

Kevin D. Sheedy

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: This paper analyses optimal monetary policy in response to shocks using a model that avoids making specific assumptions about the stickiness of prices, and thus the nature of the Phillips curve. Nonetheless, certain robust features of the optimal monetary policy commitment are found. The optimal policy rule is a flexible inflation target which is adhered to in the short run without any accommodation of structural inflation persistence, that is, inflation which it is costly to eliminate. The target is also made more stringent when it has been missed in the past. With discretion on the other hand, the target is loosened to accommodate fully any structural inflation persistence, and any past deviations from the inflation target are ignored. These results apply to a wide range of price stickiness models because the market failure which the policymaker should aim to mitigate arises from imperfect competition, not from price stickiness itself.

Keywords: Inflation persistence; optimal monetary policy; rules versus discretion; stabilization bias; inflation targeting (search for similar items in EconPapers)
JEL-codes: E5 (search for similar items in EconPapers)
Date: 2007-11
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Robustly optimal monetary policy (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:cep:cepdps:dp0840

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