Research Discussion Papers, Bank of Finland
No 24/2007:
Optimal monetary policy in a hybrid New Keynesian model with a cost channel
Mikael Bask ()
Abstract: This study shows that an expectations-based optimal policy
rule has desirable properties in a standard macroeconomic model
incorporating a cost channel for monetary disturbances and inflation rate
expectations that are partly backward-looking. Specifically, optimal
monetary policy under commitment is associated with a determinate REE that
is stable under learning, whereas, under discretion, the central bank has
to be sufficiently inflation averse for the equilibrium to have these
properties.
Keywords: commitment; determinacy; discretion; expectations-based rule; least squares learning; (follow links to similar papers)
JEL-Codes: E52; E61; (follow links to similar papers)
35 pages, December 5, 2007
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