Working Paper: NBER ID: w9939
Authors: Marc P. Giannoni; Michael Woodford
Abstract: This paper characterizes optimal monetary policy for a range of alternative economic models in terms of a flexible inflation targeting rule, with a target criterion that depends on the model specification. It shows which forecast horizons should matter, and which variables besides inflation should be taken into account, for each specification. The likely quantitative significance of the various factors considered in the general discussion is then assessed by estimating a small, structural model of the U.S. monetary transmission mechanism with explicit optimizing foundations. An optimal policy rule is computed for the estimated model, and shown to correspond to a multi-stage inflation-forecast targeting procedure. The degree to which actual U.S. policy over the past two decades has conformed to the optimal target criteria is then considered.
Keywords: No keywords provided
JEL Codes: E52; E61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| flexible inflation targeting rule (E31) | stabilize inflation expectations (E31) |
| flexible inflation targeting rule (E31) | reduce output cost of maintaining low inflation (E31) |
| optimal policy rule (E61) | stabilization of inflation and output gaps (E63) |
| trade-off between inflation stabilization and output-gap stabilization (E63) | justification for departures from immediate inflation stabilization (E63) |
| optimal responses to cost-push shocks (E31) | stabilization objectives of monetary policy (E63) |
| stabilization objectives of monetary policy (E63) | expected utility of households (D11) |
| optimal target criterion (L21) | achieve desired economic outcomes (P17) |