TY  - JOUR
AU  - Giannoni,Marc P.
AU  - Woodford,Michael
TI  - Optimal Interest-Rate Rules: II. Applications
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9420
PY  - 2003
Y2  - January 2003
UR  - http://www.nber.org/papers/w9420
L1  - http://www.nber.org/papers/w9420.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@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  - 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.
ER  -