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Optimal Monetary Policy and Price Stability Over the Long-Run

Oleksiy Kryvtsov (), Malik Shukayev () and Alexander Ueberfeldt

Staff Working Papers from Bank of Canada

Abstract: This paper examines the role of monetary policy in an environment with aggregate risk and incomplete markets. In a two-period overlapping-generations model with aggregate uncertainty and nominal bonds, optimal monetary policy attains the ex-ante Pareto optimal allocation. This policy aims to stabilize the savings rate in the economy via the effect of expected inflation on real returns of nominal bonds. The equilibrium under optimal monetary policy is characterized by positive average inflation and a nonstationary price level. In an application a key finding is that optimal monetary policy combines features of inflation and price-level targeting.

Keywords: Monetary; policy; framework (search for similar items in EconPapers)
JEL-codes: E5 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2007
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:07-26

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