Working Paper: NBER ID: w8882
Authors: Christian Jensen; Bennett T. McCallum
Abstract: Several recent papers have usefully emphasized the inefficiency that arises from discretionary monetary policymaking, relative to optimal policy from a 'timeless perspective,' in macroeconomic models with forward-looking private behavior. The inefficiency in question is in terms of average outcomes of the conditional expectation of a policy objective that reflects the discounted present value of current and future period losses (which involve squared deviations of inflation and output from specified target levels). In the literature, most of the analysis has been conducted in an optimizing model that features a Calvo-Rotemberg price adjustment equation that includes a 'cost-push' shock term. This literature suggests that policy, which keeps inflation equal to a negative multiple of the change in the output gap, is optimal with respect to the criterion mentioned above -- the unconditional expectation of the policymaker's objective function. Results reported here show, however, that this is not the case -- that an alternative policy rule, suggested by the approach of 'policy design' rather than by 'optimal control,' delivers superior results.
Keywords: No keywords provided
JEL Codes: E52; E58; E30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| discretionary monetary policymaking (E60) | inefficiencies in average outcomes related to inflation and output deviations from targets (E31) |
| policy rule 5 (E61) | larger average loss than policy rule 9 (G22) |
| policy rule 9 (E61) | smaller average loss than policy rule 5 (G52) |