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How forward-looking is optimal monetary policy?

Marc Giannoni () and Michael Woodford ()

Proceedings, 2003, 1425-1483

Abstract: We calculate optimal monetary policy rules for several variants of a simple optimizing model of the monetary transmission mechanism with sticky prices and/or wages. We show that robustly optimal rules can be represented by interest-rate feedback rules that generalize the celebrated proposal of Taylor (1993). Optimal rules, however, require that the current interest rate operating target depend positively on the recent past level of the operating target, and its recent rate of increase, in a way that is characteristic of estimated central bank reaction functions, but not of Taylor's proposal.

Keywords: Banks and banking, Central; Inflation (Finance); Monetary policy (search for similar items in EconPapers)
Date: 2003
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