Optimal monetary policy in a Phillips-curve world |
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Authors: | Thomas F. Cooley |
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Affiliation: | a Department of Economics, Stern School of Business, New York University, 44 W Fourth Street, New York, NY 10012, USA b Department of Finance and Business Economics, Marshall School of Business, University of Southern California, California, CA 90089, USA |
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Abstract: | In this paper, we study optimal monetary policy in a model that integrates the modern theory of unemployment with a liquidity model of monetary transmission. Two policy environments are considered: period-by-period optimization (time consistency) and full commitment (Ramsey allocation). When the economy is subject to productivity shocks, the optimal policy is pro-cyclical. We also characterize the long-term properties of monetary policy and show that with commitment the optimal inflation rate is inversely related to the bargaining power of workers. Both results find empirical support in the data. |
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Keywords: | E5 E6 J64 |
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