Working Paper
Forward-Looking Behavior and the Optimality of the Taylor Rule
Abstract: This paper derives a closed-form solution for the optimal discretionary monetary policy in a small macroeconomic model that allows for varying degrees of forward-looking behavior. We show that a more forward-looking aggregate demand equation serves to attenuate the response to inflation and the output gap in the optimal interest rate rule. In contrast, a more forward-looking real interest rate equation serves to magnify the response to both variables. A more forward-looking Phillips curve serves to attenuate the response to inflation but magnifies the response to the output gap.
JEL Classification: E31; E32; E43; E52;
https://doi.org/10.24148/wp2001-03
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Bibliographic Information
Provider: Federal Reserve Bank of San Francisco
Part of Series: Working Paper Series
Publication Date: 2003-02-11
Number: 2001-03
Note: Original date of publication: February 1, 2001. Original title: Forward-looking behavior and the optimality of the Taylor rule.