Optimal Target Criteria for Stabilization Policy

Optimal target criteria for stabilization policy

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’ structural equations, (ii) strong enough to imply a unique equilibrium, and (iii) optimal, in the sense that a commitment to adjust the ...

Optimal Monetary Stabilization Policy∗

Optimal Stabilization Policy with Endogenous Firm Entry

We study optimal monetary stabilization policy in a dynamic stochastic general equilibrium model where money is essential for trade and …rm entry is endogenous. We do so when all prices are ‡exible and also when some are sticky. Due to an externality a¤ecting …rm entry, the central bank deviates from the Friedman rule. Calibration exercises suggest that the nominal interest rate should have bee...

An Exploration of Optimal Stabilization Policy

This paper examines the optimal response of monetary and fiscal policy to a decline in aggregate demand. The theoretical framework is a two-period general equilibrium model in which prices are sticky in the short run and flexible in the long run. Policy is evaluated by how well it raises the welfare of the representative household. Although the model has Keynesian features, its policy prescript...

Optimal Stabilization Policy with Search Externalities

We study optimal monetary stabilization policy in a DSGE model with microfounded money demand. A search externality creates ‘congestion’ which causes aggregate output to be inefficient. Due to the informational frictions that give rise to money, households are unable to perfectly insure themselves against aggregate shocks. This gives rise to a welfare improving role for monetary policy that wor...