Optimal operational monetary policy in the Christiano-Eichenbaum-Evans model of the U.S. business cycle
By: Stephanie Schmitt-Grohe, Martin Uribe.
Contributors: Uribe, Martin.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 10724; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 10724.
Publisher: National Bureau of Economic Research
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Interest rates -- Econometric models.
Description: "This paper identifies optimal interest-rate rules within a rich, dynamic, general equilibrium model that has been shown to account well for observed aggregate dynamics in the postwar United States.  We perform policy evaluations based on second-order accurate approximations to conditional and unconditional expected welfare.  We require that interest-rate rules be operational, in the sense that they include as arguments only a few readily observable macroeconomic indicators and respect the zero bound on nominal interest rates.  We find that the optimal operational monetary policy is a real-interest-rate targeting rule.  That is, an interest-rate feedback rule featuring a unit inflation coefficient, a mute response to output, and no interest-rate smoothing.  Contrary to existing studies, we find a significant degree of optimal inflation volatility.  A key factor driving this result is the assumption of indexation to past inflation.  Under indexation to long-run inflation the optimal inflation volatility is close to zero.  Finally, we show that initial conditions matter for welfare rankings of policies"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
Title from PDF file as viewed on 1/10/2005.
Also available in print.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.