Optimal monetary policy in an estimated SIR model

Ghassane Benmir, Ivan Jaccard and Gauthier Vermandel
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Ghassane Benmir: LSE - Department of Statistics - London School of Economics - LSE - London School of Economics and Political Science

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Abstract: This paper studies the design of Ramsey optimal monetary policy in a Health New Keynesian (HeNK) model with Susceptible, Infected and Recovered (SIR) agents. The nonlinear model is estimated with maximum likelihood techniques on Euro Area data. Our objective is to deconstruct the mechanism by which contagion risk affects the conduct of monetary policy. If monetary policy is the only game in town, we find that optimal policy features significant deviations from price stability to mitigate the effect of the pandemic. The best outcome is obtained when the optimal Ramsey policy is combined with a lockdown strategy of medium intensity. In this case, monetary policy can concentrate on its price stabilization objective.

Keywords: SIR (search for similar items in EconPapers)
Date: 2023-07
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Published in European Economic Review, 2023, 156, pp.104502. ⟨10.1016/j.euroecorev.2023.104502⟩

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Journal Article: Optimal monetary policy in an estimated SIR model (2023)
Working Paper: Optimal monetary policy in an estimated SIR model (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04502674

DOI: 10.1016/j.euroecorev.2023.104502

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