Should Monetary Policy Lean against the Wind? An Evidence from a DSGE Model with Occasionally Binding Constraint

Jan Žáček

No 2018/37, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: This research paper studies the performance of the Taylor-type rules augmented with output and asset prices, and compares their performance in a model with an eternally and occasionally binding constraint. The rules are examined under the optimisation of a central bank's loss function and a welfare maximisation of the economic agents. The analysis delivers the following results. The model with occasionally binding constraint has more favourable properties regarding the hump-shaped and asymmetric impulse responses compared to the eternally binding constraint model. The best rule regarding the lowest value of the central banks' loss function proves to be the rule augmented with asset prices. The optimal reactions are, however, shock- and model-dependent. Moreover, a chosen specification of the loss function plays a significant role. The welfare maximisation reveals that reacting to asset prices might not be welfare-improving for both types of economic agents – households and entrepreneurs. This result is, however, model-dependent.

Keywords: asset prices; DSGE; leaning-against-the-wind; monetary policy; non-linearities; Taylor Rule (search for similar items in EconPapers)
JEL-codes: E30 E44 E50 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2018-12, Revised 2018-12
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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