Working Paper: NBER ID: w1988
Authors: Stephen J. Turnovsky
Abstract: This paper demonstrates that if current shocks are observed instantaneously, output can be stabilized perfectly for completely general supply disturbances, using simple monetary rules based only on: (i) the current shock, (ii) the previous forecast of the current shock, (iii) the forecast for just one period ahead. The optimal rule can be expressed in an infinite number of ways and various alternatives are considered. With optimal wage indexation, the monetary rule is even simpler. If current shocks are not observed instantaneously, but are inferred from other signals, the optimal rules are of the same form, with the current perceived disturbance replacing the actual.
Keywords: monetary policy; supply shocks; optimal response; wage indexation
JEL Codes: E52; E31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| current shocks (E32) | output stabilization (E63) |
| previous forecast of current shock (E17) | output stabilization (E63) |
| one-period ahead forecast (C53) | output stabilization (E63) |
| perception of shock (D80) | monetary policy response (E52) |
| monetary policy response (E52) | output stabilization (E63) |