TY - JOUR
AU - Giannoni,Marc P.
AU - Woodford,Michael
TI - Optimal Target Criteria for Stabilization Policy
JF - National Bureau of Economic Research Working Paper Series
VL - No. 15757
PY - 2010
Y2 - February 2010
DO - 10.3386/w15757
UR - http://www.nber.org/papers/w15757
L1 - http://www.nber.org/papers/w15757.pdf
N1 - Author contact info:
Marc Giannoni
Federal Reserve Bank of New York
Macroeconomic & Monetary Studies Function
Research and Statistics Group
33 Liberty Street
New York, NY 10045-0001
Tel: 212-720-6518
Fax: 212-720-1844
E-Mail: mg2190@gsb.columbia.edu
Michael Woodford
Department of Economics
Columbia University
420 W. 118th Street
New York, NY 10027
Tel: 212/854-1094
Fax: 212-854-8059
E-Mail: mw2230@columbia.edu
AB - This paper considers a general class of nonlinear rational-expectations models in which policymakers seek to maximize an objective function that may be household expected utility. We show how to derive a target criterion that is: (i) consistent with the model's structural equations, (ii) strong enough to imply a unique equilibrium, and (iii) optimal, in the sense that a commitment to adjust the policy instrument at all dates so as to satisfy the target criterion maximizes the objective function. The proposed optimal target criterion is a linear equation that must be satisfied by the projected paths of certain economically relevant "target variables". It takes the same form at all times and generally involves only a small number of target variables, regardless of the size and complexity of the model. While the projected path of the economy requires information about the current state, the target criterion itself can be stated without reference to a complete description of the state of the world. We illustrate the application of the method to a nonlinear DSGE model with staggered price-setting, in which the objective of policy is to maximize household expected utility.
ER -