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Federal Reserve Bank of San Francisco
Working Paper Series
Forward-looking behavior and optimal discretionary monetary policy
Kevin J. Lansing
Bharat Trehan
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. ; Original title: Forward-looking behavior and the optimality of the Taylor rule.


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Kevin J. Lansing & Bharat Trehan, Forward-looking behavior and optimal discretionary monetary policy, Federal Reserve Bank of San Francisco, Working Paper Series 2001-03, 2003.
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Keywords: Monetary policy ; Inflation (Finance) ; Taylor's rule
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