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

Jeffery D. Amato and Thomas Laubach

No RWP 99-09, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: This paper serves two purposes. First, it provides estimates of an optimization-based equilibrium model with sticky prices and wages. Second, the estimated model is used to analyze 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 tradeoff between the variances of price and wage inflation and the output gap. This tradeoff 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 a much lower level of welfare.

Keywords: Monetary policy; Prices; Wages (search for similar items in EconPapers)
Pages: 36
Date: 1999
New Economics Papers: this item is included in nep-mon
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Citations: View citations in EconPapers (10)

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https://www.kansascityfed.org/documents/5268/pdf-rwp99-09.pdf (application/pdf)

Related works:
Working Paper: Monetary policy in an estimated optimisation-based model with sticky prices and wages (2000)
Working Paper: MONETARY POLICY IN AN ESTIMATED OPTIMIZATION-BASED MODEL WITH STICKY PRICES AND WAGES (2000)
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