A Promised Value Approach to Optimal Monetary Policy

Timothy S. Hills, Taisuke Nakata and Takeki Sunakawa

No 2018-083, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper characterizes optimal commitment policy in the New Keynesian model using a novel recursive formulation of the central bank's infinite horizon optimization problem. In our recursive formulation motivated by Kydland and Prescott (1980), promised inflation and output gap---as opposed to lagged Lagrange multipliers---act as pseudo-state variables. Using three well known variants of the model---one featuring inflation bias, one featuring stabilization bias, and one featuring a lower bound constraint on nominal interest rates---we show that the proposed formulation sheds new light on the nature of the intertemporal trade-off facing the central bank.

Keywords: Commitment; Inflation bias; Optimal policy; Ramsey plans; Stabilization bias; Zero lower bound (search for similar items in EconPapers)
JEL-codes: E32 E52 E61 E62 E63 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2018-12-03
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
Citations: View citations in EconPapers (1)

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https://www.federalreserve.gov/econres/feds/files/2018083pap.pdf (application/pdf)

Related works:
Journal Article: A Promised Value Approach to Optimal Monetary Policy (2021)
Working Paper: A Promised Value Approach to Optimal Monetary Policy (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2018-83

DOI: 10.17016/FEDS.2018.083

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