Transmission lags and optimal monetary policy |
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Authors: | Juha Kilponen Kai Leitemo |
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Institution: | a Bank of Finland, Monetary Policy and Research Department, Snellmaninaukio, 00100 Helsinki, Finland b Norwegian School of Management (BI), Nydalsveien 37, 0442 Oslo, Norway |
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Abstract: | The credibility problems of monetary policy are enlarged by transmission lags whenever the welfare criterion consists of arguments with differing transmission lags. If, as usually argued, prices react to monetary policy with a longer lag than output, the discretionary bias is substantially increased under a consumer welfare maximizing policy criterion (flexible inflation targeting) in the prototype New Keynesian model. Money growth targeting can significantly reduce the discretionary bias, but is not robust to other specifications of welfare with higher valuation of output stability. |
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Keywords: | Discretion and stabilization bias Monetary policy Transmission lags Inflation targeting Money targeting |
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