On December 12, 2019, Fed in Print will introduce its new platform for discovering content. Please direct your questions to Anna Oates

Home About Latest Browse RSS Advanced Search

Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
A Promised Value Approach to Optimal Monetary Policy
Timothy S. Hills
Taisuke Nakata
Takeki Sunakawa
Abstract

This paper characterizes optimal commitment policy in the New Keynesian model using a novel recursive formulation of the central bank's infinite horizon optimization problem. In our recursive formulation motivated by Kydland and Prescott (1980), promised inflation and output gap---as opposed to lagged Lagrange multipliers---act as pseudo-state variables. Using three well known variants of the model---one featuring inflation bias, one featuring stabilization bias, and one featuring a lower bound constraint on nominal interest rates---we show that the proposed formulation sheds new light on the nature of the intertemporal trade-off facing the central bank.


Download Full text
Cite this item
Timothy S. Hills & Taisuke Nakata & Takeki Sunakawa, A Promised Value Approach to Optimal Monetary Policy, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2018-083, 03 Dec 2018.
More from this series
JEL Classification:
Subject headings:
Keywords: Commitment ; Inflation bias ; Optimal policy ; Ramsey plans ; Stabilization bias ; Zero lower bound
DOI: 10.17016/FEDS.2018.083
For corrections, contact Ryan Wolfslayer ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal