A Promised Value Approach to Optimal Monetary Policy

65 Pages Posted: 5 Dec 2018 Last revised: 21 Feb 2019

See all articles by Timothy Hills

Timothy Hills

New York University (NYU)

Taisuke Nakata

Board of Governors of the Federal Reserve System

Takeki Sunakawa

Kobe University

Date Written: 2018-12-03

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.

Keywords: Commitment, Inflation bias, Optimal policy, Ramsey plans, Stabilization bias, Zero lower bound

JEL Classification: E61, E63, E52, E32, E62

Suggested Citation

Hills, Timothy and Nakata, Taisuke and Sunakawa, Takeki, A Promised Value Approach to Optimal Monetary Policy (2018-12-03). FEDS Working Paper No. 2018-083. Available at SSRN: https://ssrn.com/abstract=3296150 or http://dx.doi.org/10.17016/FEDS.2018.083

Timothy Hills (Contact Author)

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

Taisuke Nakata

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Takeki Sunakawa

Kobe University ( email )

2-1, Rokkodai-cho, Nada-ku
Kobe, 657-8501, 657-8501
Japan

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