Active and Passive Monetary Policy in an Overlapping Generations Model

Gerhard Sorger

Review of Economic Dynamics, 2005, vol. 8, issue 3, 731-748

Abstract: In a standard overlapping generations model, active monetary policy reinforces mechanisms that lead to equilibrium indeterminacy and to countercyclical behavior of young-age consumption. The policy rule which minimizes inflation volatility can be active or passive, depending on the characteristics of shocks and the risk aversion of households. Inflation forecast errors are always greater under active inflation forecast targeting than under passive inflation forecast targeting or strict money growth targeting. Indeterminacy is more likely under an active forwardlooking rule than under the corresponding backward-looking rule, but backward-looking rules can render the monetary steady state unstable. (Copyright: Elsevier)

Keywords: Monetary policy rules; indeterminacy; business cycles (search for similar items in EconPapers)
JEL-codes: E32 E52 (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (10)

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DOI: 10.1016/j.red.2005.01.009

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