Optimal Simple Nonlinear Rules for Monetary Policy in a New-Keynesian Model

Paolo Zagaglia, Massimiliano Marzo and Ingvar Strid ()

No 392, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: We study the role of nonlinear simple rules for monetary policy. We depart from the standard rules proposed by Taylor (1993), and consider a nonlinear rule for the so-called opportunistic approach to disinflation originally proposed by Orphanides and Wilcox (2002) and Aksoy, Orphanides, Small, Wieland, and Wilcox (2002). We set out a model economy with capital accumulation and nominal and real rigidities. Households have weakly-separable preferences along the lines of Chari, Kehoe, and McGrattan (2000). The public sector is modeled as a simple rule for lump-sum taxes like in Leeper (1991). We include three sources of exogenous fluctuations in the form of stochastic shocks to productivity, firmsâ€™ markup and government spending. We solve the model through the second-order Taylor approach developed by Schmitt-GrohÃ© and Uribe (2004), and maximize a measure of conditional consumer welfare. Our microfounded model represents an improvement over the framework used by Aksoy, Orphanides, Small, Wieland, and Wilcox (2002). Our results support the view that optimal opportunistic monetary policy involves a strong anti-inflationary stance outside the zone of policy inaction, indicating that a large degree of nonlinearity can be desirable from a welfare perspective. We also compare the quantitative and qualitative properties of the model economy under the optimal nonlinear rule with those arising from optimized linear rules.

Keywords: monetary policy; opportunistic approach to disinflation; numerical methods (search for similar items in EconPapers)
JEL-codes: E43 E52 (search for similar items in EconPapers)
Date: 2006-07-04
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecfa:392

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