Optimal monetary policy regime switches

Jason Choi and Andrew Foerster

No RWP 16-7, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: Given regime switches in the economy?s growth rate, optimal monetary policy rules may respond by switching policy parameters. These optimized parameters differ across regimes and from the optimal choice under fixed regimes, particularly in the inflation target and interest rate inertia. Optimal switching rules produce welfare gains relative to constant rules, with switches in the implicit real interest rate used for policy and the degree of interest rate inertia producing the largest gains. However, gains from switching rules decrease if the monetary authority trades-off the probability of low rates, or if it may misidentify the regime.

Keywords: Growth rate; Optimal policy; Regime switching; Taylor rule; Inflation target (search for similar items in EconPapers)
JEL-codes: C63 E31 E52 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2016-08-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (14)

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Related works:
Journal Article: Optimal Monetary Policy Regime Switches (2021)
Working Paper: Optimal Monetary Policy Regime Switches (2020)
Working Paper: Online Appendix to "Optimal Monetary Policy Regime Switches" (2020)
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