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Robustly optimal monetary policy

By Kevin D. Sheedy

Abstract

This paper analyses optimal monetary policy in response to shocks using a model that avoids making specific assumptions about the stickiness of prices, and thus the nature of the Phillips curve. Nonetheless, certain robust features of the optimal monetary policy commitment are found. The optimal policy rule is a flexible inflation target which is adhered to in the short run without any accommodation of structural inflation persistence, that is, inflation which it is costly to eliminate. The target is also made more stringent when it has been missed in the past. With discretion on the other hand, the target is loosened to accommodate fully any structural inflation persistence, and any past deviations from the inflation target are ignored. These results apply to a wide range of price stickiness models because the market failure which the policymaker should aim to mitigate arises from imperfect competition, not from price stickiness itself

Topics: HB Economic Theory
Publisher: Centre for Economic Performance, London School of Economics and Political Science
Year: 2007
OAI identifier: oai:eprints.lse.ac.uk:3737
Provided by: LSE Research Online

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