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Optimal Monetary Stabilization Policy

Michael Woodford ()

No 16095, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper reviews the theory of optimal monetary stabilization policy, with an emphasis on developments since the publication of Woodford (2003). The structure of optimal policy commitments is considered, both when the objective of stabilization policy is defined by an arbitrarily specified quadratic loss function, and when the objective of policy is taken to be the maximization of expected utility. Issues treated include the time inconsistency of optimal policies and the need for commitment; the relation of optimal policy from a "timeless perspective" to the Ramsey conception of optimal policy; and the advantages of forecast targeting procedures as an approach to the implementation of optimal stabilization policy. The usefulness of characterizing optimal policy in terms of a target criterion is illustrated in a range of examples. These include models with a variety of assumptions about the nature of price and wage adjustment; models that allow for sectoral heterogeneity; cases in which policy must be conducted on the basis of imperfect information; and cases in which the zero lower bound on the policy rate constrains the conduct of policy.

JEL-codes: E52 E61 (search for similar items in EconPapers)
Date: 2010-06
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: EFG ME
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Published as “Optimal Monetary Stabilization Policy,” in B.M. Friedman and M. Woodford, eds., Handbook of Monetary Economics, vol. 3B, Amsterdam: Elsevier, 2011.

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