Monetary Policy in an Estimated Optimisation-Based Model with Sticky Prices and Wages

46 Pages Posted: 13 Dec 2005

See all articles by Jeffery D. Amato

Jeffery D. Amato

Goldman Sachs International

Thomas Laubach

Federal Reserve Board

Date Written: May 2000

Abstract

This paper serves two purposes. First, it provides estimates of an optimisation-based equilibrium model with sticky prices and wages. Second, the estimated model is used to analyse the welfare properties of various interest rate rules for conducting monetary policy. As shown by Erceg et al (1999), an important feature of this model is that it involves a trade-off between the variances of price and wage inflation and the output gap. This trade-off implies that it is desirable for the monetary authority to respond to more than inflation, output and past interest rates when setting the current interest rate. Indeed, the welfare optimal policy can be approximated with responses to both price and wage inflation and the past interest rate. By contrast, rules that call for a strong response to either detrended output or the output gap result in much lower level of welfare.

Suggested Citation

Amato, Jeffery D. and Laubach, Thomas, Monetary Policy in an Estimated Optimisation-Based Model with Sticky Prices and Wages (May 2000). BIS Working Paper No. 87. Available at SSRN: https://ssrn.com/abstract=849024 or http://dx.doi.org/10.2139/ssrn.849024

Jeffery D. Amato (Contact Author)

Goldman Sachs International ( email )

United States

Thomas Laubach

Federal Reserve Board ( email )

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