Optimal Target Criteria for Stabilization Policy
Michael Woodford and
Marc Giannoni
No 7719, CEPR Discussion Papers from C.E.P.R. Discussion Papers
Abstract:
This paper considers a general class of nonlinear rational-expectations models in which policymakers seek to maximize an objective function that may be household expected utility. We show how to derive a target criterion that is: (i) consistent with the model's structural equations, (ii) strong enough to imply a unique equilibrium, and (iii) optimal, in the sense that a commitment to adjust the policy instrument at all dates so as to satisfy the target criterion maximizes the objective function. The proposed optimal target criterion is a linear equation that must be satisfied by the projected paths of certain economically relevant "target variables." It takes the same form at all times and generally involves only a small number of target variables, regardless of the size and complexity of the model. While the projected path of the economy requires information about the current state, the target criterion itself can be stated without reference to a complete description of the state of the world. We illustrate the application of the method to a nonlinear DSGE model with staggered price-setting, in which the objective of policy is to maximize household expected utility.
Keywords: Dynamic model; Optimal control; Optimal policy; Target criterion (search for similar items in EconPapers)
JEL-codes: C61 C62 E32 E52 (search for similar items in EconPapers)
Date: 2010-02
References: Add references at CitEc
Citations: View citations in EconPapers (28)
Downloads: (external link)
https://cepr.org/publications/DP7719 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
Related works:
Journal Article: Optimal target criteria for stabilization policy (2017) 
Working Paper: Optimal target criteria for stabilization policy (2012) 
Working Paper: Optimal Target Criteria for Stabilization Policy (2010) 
Working Paper: Optimal Target Criteria for Stabilization Policy (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:7719
Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP7719
Access Statistics for this paper
More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().