A Promised Value Approach to Optimal Monetary Policy

Timothy Hills, Taisuke Nakata and Takeki Sunakawa
Additional contact information
Timothy Hills: New York University
Taisuke Nakata: University of Tokyo
Takeki Sunakawa: Hitotsubashi University

No CARF-F-481, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: This paper characterizes optimal commitment policy in the New Keynesian model using a recursive formulation of the central bank's in finite horizon optimization problem in which promised inflation and output gap - as opposed to lagged Lagrange multipliers - act as pseudo-state variables. Our recursive formulation is motivated by Kydland and Prescott (1980). Using three well known variants of the model - one featuring inflation bias, one featuring stabilization bias, and one featuring a lower bound constraint on nominal interest rates - we show that the proposed formulation sheds new light on the nature of the intertemporal trade-off facing the central bank.

Pages: 65
Date: 2020-05
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Related works:
Journal Article: A Promised Value Approach to Optimal Monetary Policy (2021)
Working Paper: A Promised Value Approach to Optimal Monetary Policy (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:cfi:fseres:cf481

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