Welfare-Based Monetary Policy Rules in an Estimated DSGE Model of the Us Economy

68 Pages Posted: 22 May 2006

See all articles by Michel Juillard

Michel Juillard

Banque de France - Economic Study and Research Division

Philippe D. Karam

International Monetary Fund (IMF)

Douglas Laxton

International Monetary Fund (IMF) - Research Department

Paolo A. Pesenti

Federal Reserve Bank of New York; National Bureau of Economic Research (NBER)

Date Written: April 2006

Abstract

We develop and estimate a stylized micro-founded model of the US economy. Next we compute the parameters of a simple interest rate policy rule that maximizes the unconditional mean of utility. We show that such a welfare-based rule lies close to the Taylor efficiency frontier. A counterfactual analysis assesses to what extent using such a rule as a guideline for monetary policy would have helped to avoid the inflationary swings of the 1970s and reduce the severity of boom and bust cycles. The paper also provides estimates of the welfare implications of business cycle variability and discusses their relevance.

Keywords: Competition, markups, monetary policy, Taylor rule

JEL Classification: C51, E31, E52

Suggested Citation

Juillard, Michel and Karam, Philippe and Laxton, Douglas and Pesenti, Paolo A., Welfare-Based Monetary Policy Rules in an Estimated DSGE Model of the Us Economy (April 2006). ECB Working Paper No. 613, Available at SSRN: https://ssrn.com/abstract=891014 or http://dx.doi.org/10.2139/ssrn.891014

Michel Juillard (Contact Author)

Banque de France - Economic Study and Research Division ( email )

31, rue Croix des Petits Champs
75049 Paris Cedex 01
FRANCE

Philippe Karam

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Douglas Laxton

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Paolo A. Pesenti

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5493 (Phone)
212-720-6831 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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