Hostname: page-component-78c5997874-m6dg7 Total loading time: 0 Render date: 2024-11-15T14:57:43.268Z Has data issue: false hasContentIssue false
  • English
  • Français

Optimal Monetary Policy

Published online by Cambridge University Press:  26 March 2020

Andrew P. Blake ,
Martin Weale  and
Garry Young
Get access Rights & Permissions [Opens in a new window]

Abstract

In this article we propose a policy framework for inflation targeting that contains elements of both optimal and simple rules. We use a simple feedback rule for the interest rate to look after monetary policy in the long run whilst using optimal control in the short run to determine appropriate responses to shocks. The composite policy is capable of substantial welfare improvements over using a simple rule alone whilst maintaining tractability. We see the use of such a framework together with a fully specified model as a feasible approach to practical policy design.

Type
Articles
Information
National Institute Economic Review , Volume 164 , April 1998 , pp. 100 - 109
Copyright
Copyright © 1998 National Institute of Economic and Social Research

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

A previous version of this paper was presented at an ESRC conference on Macroeconomic Modelling and Economic Policy, London 8-9 January 1998. The research it describes has been supported by the ESRC.

References

Bernanke, Ben S. and Mark Woodford (1997), ‘Inflation forecasts and monetary policy’, NBER Working Paper 6157.CrossRefGoogle Scholar
Blake, Andrew P. (1996), ‘Forecast error bounds by stochastic simulation’, National Institute Economic Review, no. 156, 72–79.CrossRefGoogle Scholar
Blake, Andrew P. (1997), ‘Evaluating policy rules by stochastic simulation’, mimeo, NIESR.Google Scholar
Blake, Andrew P. and Westaway, Peter F. (1995), ‘An analysis of the impact of finite horizons on macroeconomic control’, Oxford Economic Papers, 47, 98–116.CrossRefGoogle Scholar
Church, Keith B., Mitchell, Peter R., Smith, Peter N. and Wallis, Kenneth F. (1996), ‘Targeting inflation: Comparative control exercises on models of the UK economy’, Economic Modelling, 13, 169–184.CrossRefGoogle Scholar
Fisher, P. (1992), Rational Expectations in Macroeconomic Models, Dordrect, Kluwer Academic Publishers.CrossRefGoogle Scholar
Hall, S.G. (1986), ‘Inconsistency and optimal policy formulation in the presence of rational expectations’, Journal of Economic Dynamics and Control 10, 323–326.CrossRefGoogle Scholar
Svensson, Lars E.O. (1997), ‘Inflation forecast targeting: Implementing and monitoring inflation targets’, European Economic Review, 41, 1111–1146.CrossRefGoogle Scholar
Taylor, John B. (1996), ‘How should monetary policy respond to shocks while maintaining long-run price stability?—Conceptual issues’, in Achieving Price Stability, Federal Reserve Bank of Kansas City.Google Scholar
Weale, Martin, Andrew Blake, Nicos Christodoulakis, James Meade and David Vines (1989), Macroeconomic Policy: Inflation, Wealth and the Exchange Rate, London: Unwin-Hyman.Google Scholar
Westaway, Peter F. (1986), ‘Some experiments with simple feedback rules on the Treasury model’, GES Working paper no. 87.Google Scholar
Westaway, Peter F. (1995), ‘The role of macroeconomic models in the policy design process’, National Institute Economic Review, no. 151, 53–64.CrossRefGoogle Scholar