Optimal Monetary Policy and Expectation Driven Business Cycles

Shen Guo

MPRA Paper from University Library of Munich, Germany

Abstract: We explore the optimal response of central bank when a news shock hits the economy, that is, agents’ optimistic expectation of an improvement in technology does not realize. Ramsey optimal policy and simple policy rules are studied in a two-sector model with price rigidities in each of non-durable and durable sector. We find that a simple policy rule reacting to the inflation rates in both non-durable and durable sector with appropriate weights can mimic the performance of the Ramsey policy closely. Another interesting result is that monetary policy plays an important role in generating expectation driven business cycles.

Keywords: News shocks; Expectation driven business cycles; Optimal monetary policy (search for similar items in EconPapers)
JEL-codes: E32 E52 (search for similar items in EconPapers)
Date: 2007-02-10
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:1928

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