NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Optimal Interest-Rate Rules: II. Applications

Marc P. Giannoni, Michael Woodford

NBER Working Paper No. 9420
Issued in January 2003
NBER Program(s):   EFG   ME

In this paper we calculate robustly optimal monetary policy rules for several variants of a simple optimizing model of the monetary transmission mechanism with sticky prices and/or wages. We discuss representations of optimal policy both in terms of interest-rate feedback rules that generalize the well-known Taylor rule,' and in terms of commitment to a target criterion of the kind discussed in familiar proposals for flexible inflation targeting.' Optimal rules, however, require that policy be history-dependent in ways not contemplated by many well-known proposals. We furthermore find that a robustly optimal policy rule is almost inevitably an implicit rule, that requires the central bank to use a structural model to project the economy's evolution under the contemplated policy action. Finally, our numerical examples suggest that optimal rules do not place nearly as much weight on projections of inflation or output many quarters in the future as occurs under the current practice of inflation-forecast targeting central banks.

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Document Object Identifier (DOI): 10.3386/w9420

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