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Implementing Optimal Monetary Policy in New-Keynesian Models with Inertia

George Evans () and Bruce McGough ()

University of Oregon Economics Department Working Papers from University of Oregon Economics Department

Abstract: We consider optimal monetary policy in New Keynesian models with inertia. First order conditions, which we call the MJB-alternative, are found to improve upon the timeless perspective. The MJB-alternative is shown to be the best possible in the sense that it minimizes policymakers' unconditional expected loss, and further, it is numerically found to offer significant improvement over the timeless perspective. Implementation of the MJB-alternative is considered via construction of interest-rate rules that are consistent with its associated unique equilibrium. Following Evans and Honkapohja (2004), an expectations based rule is derived that always yields a determinate model and an E-stable equilibrium. Further, the "policy manifold" of all interest-rate rules consistent with the MJB-alternative is classified, and open regions of this manifold are shown to correspond to indeterminate models and unstable equilibria.

Keywords: Monetary Policy; Taylor Rules; Indeterminacy; E-stability (search for similar items in EconPapers)
JEL-codes: D83 D84 E32 E52 (search for similar items in EconPapers)
Pages: 36
Date: 2006-06-03
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Journal Article: Implementing Optimal Monetary Policy in New-Keynesian Models with Inertia (2010) Downloads
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