Welfare gains in a small open economy with a dual mandate for monetary policy

33 Pages Posted: 12 Oct 2021

See all articles by Punnoose Jacob

Punnoose Jacob

Reserve Bank of New Zealand

Murat Ozbilgin

Reserve Bank of New Zealand

Date Written: October 12, 2021

Abstract

In March 2019, the Reserve Bank of New Zealand was entrusted with a new employment stabilisation objective, that complements its traditional price-stability mandate. Against this backdrop, we assess whether the central bank’s stronger emphasis on the stabilisation of employment, and more broadly, resource utilisation, enhances social welfare. We calibrate an open-economy growth model to New Zealand data. In a second order approximation of the model, we evaluate how lifetime household utility is affected by a wide range of simple and implementable monetary policy rules that target both inflation and resource utilisation. We find that additionally stabilising resource utilisation always improves social welfare at any given level of inflation stabilisation. However, the welfare gains from stabilising resource utilisation get milder as the central bank is increasingly sensitive to inflation.

Keywords: Optimal simple rules, welfare analysis, monetary policy, dual mandate

JEL Classification: F41, E52

Suggested Citation

Jacob, Punnoose and Ozbilgin, Murat, Welfare gains in a small open economy with a dual mandate for monetary policy (October 12, 2021). CAMA Working Paper No. 89/2021, Available at SSRN: https://ssrn.com/abstract=3940755 or http://dx.doi.org/10.2139/ssrn.3940755

Punnoose Jacob (Contact Author)

Reserve Bank of New Zealand ( email )

2 The Terrace
PO Box 2498
Wellington, 6140
New Zealand

Murat Ozbilgin

Reserve Bank of New Zealand ( email )

2 The Terrace
PO Box 2498
Wellington, 6140
New Zealand

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