Optimal Monetary Policy in an Estimated SIR Model

50 Pages Posted: 21 Nov 2022

See all articles by Ghassane Benmir

Ghassane Benmir

London School of Economics and Political Science

Ivan Jaccard

European Central Bank (ECB) - Directorate General Research

Gauthier Vermandel

CMAP, Ecole polytechnique, Institut Polytechnique de Paris; LEDa, Paris-Dauphine & PSL Universities; Banque de France

Date Written: October 30, 2022

Abstract

This paper studies the design of Ramsey optimal monetary policy in a Health New Keynesian (HeNK) model with Susceptible, Infected and Recovered (SIR) agents. The nonlinear model is estimated with maximum likelihood techniques on Euro Area data. Our objective is to deconstruct the mechanism by which contagion risk affects the conduct of monetary policy. If monetary policy is the only game in town, we find that optimal policy features significant deviations from price stability to mitigate the effect of the pandemic. The best outcome is obtained when the optimal Ramsey policy is combined with a lockdown strategy of medium intensity. In this case, monetary policy can concentrate on its price stabilization objective.

Keywords: Covid-19, optimal monetary policy, nonlinear inference, HeNK, SIR model

JEL Classification: E52, E32

Suggested Citation

Benmir, Ghassane and Jaccard, Ivan and Vermandel, Gauthier, Optimal Monetary Policy in an Estimated SIR Model (October 30, 2022). Available at SSRN: https://ssrn.com/abstract=4262441 or http://dx.doi.org/10.2139/ssrn.4262441

Ghassane Benmir

London School of Economics and Political Science

Ivan Jaccard

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Gauthier Vermandel (Contact Author)

CMAP, Ecole polytechnique, Institut Polytechnique de Paris ( email )

Route de Saclay
Palaiseau, 91128
France

LEDa, Paris-Dauphine & PSL Universities ( email )

Place du Maréchal de Tassigny
Paris, Cedex 16 75775
France

Banque de France ( email )

Paris
France

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