Monetary policy in an estimated optimisation-based model with sticky prices and wages

Thomas Laubach and Jeffery Amato
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Jeffery Amato: Goldman Sachs International

No 87, BIS Working Papers from Bank for International Settlements

Abstract: This paper serves two purposes. First, it provides estimates of an optimisation-based equilibrium model with sticky prices and wages. Second, the estimated model is used to analyse the welfare properties of various interest rate rules for conducting monetary policy. As shown by Erceg et al (1999), an important feature of this model is that it involves a trade-off between the variances of price and wage inflation and the output gap. This trade-off implies that it is desirable for the monetary authority to respond to more than inflation, output and past interest rates when setting the current interest rate. Indeed, the welfare optimal policy can be approximated with responses to both price and wage inflation and the past interest rate. By contrast, rules that call for a strong response to either detrended output or the output gap result in much lower level of welfare.

Pages: 46 pages
Date: 2000-05
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Citations: View citations in EconPapers (8)

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Related works:
Working Paper: MONETARY POLICY IN AN ESTIMATED OPTIMIZATION-BASED MODEL WITH STICKY PRICES AND WAGES (2000)
Working Paper: Monetary policy in an estimated optimization-based model with sticky prices and wages (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:87

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