A Toolkit for Computing Constrained Optimal Policy Projections (Copps)

43 Pages Posted: 4 Feb 2022

See all articles by Oliver de Groot

Oliver de Groot

University of Liverpool - Management School (ULMS)

Falk Mazelis

European Central Bank (ECB)

Roberto Motto

European Central Bank (ECB)

Annukka Ristiniemi

European Central Bank (ECB)

Date Written: January 2022

Abstract

This paper presents a toolkit for generating optimal policy projections. It makes five contributions. First, the toolkit requires a minimal set of inputs: only a baseline projection for target and instrument variables and impulse responses of those variables to policy shocks. Second, it solves optimal policy projections under commitment, limited-time commitment, and discretion. Third, it handles multiple policy instruments. Fourth, it handles multiple constraints on policy instruments such as a lower bound on the policy rate and an upper bound on asset purchases. Fifth, it allows alternative approaches to address the forward guidance puzzle. The toolkit that accompanies this paper is Dynare compatible, which facilitates its use. Examples replicate existing results in the optimal monetary policy literature and illustrate the usefulness of the toolkit for highlighting policy trade-offs. We use the toolkit to analyse US monetary policy at the height of the Great Financial Crisis. Given the Fed's early-2009 baseline macroeconomic projections, we find the Fed's planned use of the policy rate was close to optimal whereas a more aggressive QE program would have been beneficial.

Keywords: asset purchases, Commitment vs. discretion, forward guidance puzzle, Lower Bound, Optimal monetary policy

JEL Classification: C61, C63, E52, E58

Suggested Citation

de Groot, Oliver and Mazelis, Falk and Motto, Roberto and Ristiniemi, Annukka, A Toolkit for Computing Constrained Optimal Policy Projections (Copps) (January 2022). CEPR Discussion Paper No. DP16865, Available at SSRN: https://ssrn.com/abstract=4026748

Oliver De Groot (Contact Author)

University of Liverpool - Management School (ULMS) ( email )

Falk Mazelis

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Roberto Motto

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Postfach 16 03 19
D-60311 Frankfurt am Main
Germany

Annukka Ristiniemi

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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