Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2006:8: Optimal Opportunistic Monetary Policy in a New-Keynesian Model

Massimiliano Marzo (), Ingvar Strid () and Paolo Zagaglia ()
Additional contact information
Massimiliano Marzo: University of Bolonga and Johns Hopkins University, Postal: Department of Economics, University of Bologna , 2, Piazza Scaravilli , 40126 Bologna BO , Italy
Ingvar Strid: Stockholm School of Economics, Postal: Department of Economic Statistics and Decision Support, PO-Box 6501, 113 83 Stockholm, Sweden
Paolo Zagaglia: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden

Abstract: The present paper compares the performance in terms of second order accurate welfare of opportunistic non-linear Taylor rules and with respect to traditional linear Taylor rules. The macroeconomic model representing the benchmark for the analysis includes capital accumulation (with quadratic costs of adjustment), price rigidities (quadratic approach), along the standard New-Keynesian approach. The model is solved up to second order approximation and welfare is evaluated according to several criteria (conditional to the non-stochastic steady state, unconditional, and according to a linear ad hoc function). The results show that: (i) the opportunistic rule is a Pareto improvement with respect to other monetary policy rules traditionally considered in the literature; (ii) the computation of welfare costs reveals that the burden of adjustment is almost entirely on labor supply fluctuations; (iii) increasing the degree of price rigidities and the degree of competition in the final goods markets, makes the opportunistic rule even more preferable with respect to the alternatives. Business Cycle statistics for the model with opportunistic rule show a large volatility in labor supply, with a limited volatility for the nominal interest rate.

Keywords: disinflation; monetary policy rules; nonlinear rules; Taylor rules

JEL-codes: E31; E61

35 pages, September 20, 2006

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