Optimal simple monetary policy rules and welfare in a DSGE Model for Hungary

Zoltán Jakab, Henrik Kucsera (), Katalin Szilágyi () and Balázs Világi ()
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Henrik Kucsera: Magyar Nemzeti Bank
Katalin Szilágyi: Magyar Nemzeti Bank
Balázs Világi: Magyar Nemzeti Bank

No 2010/4, MNB Working Papers from Magyar Nemzeti Bank (Central Bank of Hungary)

Abstract: We explore the properties of welfare-maximizing monetary policy in a medium-scale DSGE model for Hungary. In order to make our results operational from a policymaker’s perspective, we approximate the optimal policy rule with a set of simple rules reacting only to observable variables. Our results suggest that “science of monetary policy” that is found robust in simple models, holds in this medium-scaled setting as well. That is, the welfare-maximizing policy that aims to eliminate distortions associated with nominal rigidities can be approximated by a simple inflation targeting rule. Adding exchange rate into the feedback rule only marginally improves the stabilization properties of the policy rule. However, a rule reacting to wage inflation can be significantly welfare-improving. These results may suggest that in our medium-sized model the distortions associated with sticky wage setting have at least as important welfare implications as those related to the price stickiness in product markets.

Keywords: monetary policy; central banking; policy design (search for similar items in EconPapers)
JEL-codes: E52 E58 E61 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2010
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:mnb:wpaper:2010/4

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