Anticipated shocks, optimal monetary policy, and welfare

Winkler, Roland

Intertemporal general-equilibrium models with Keynesian features such as imperfect competition and imperfectly flexible prices which give rise to a (at least) short-run non-neutrality of monetary policy have become the workhorse model for monetary macroeconomics. This thesis now makes four contributions to the literature on (optimal) monetary policy: 1) We demonstrate the possible inferiority of the Ramsey monetary policy under timeless perspective commitment to simple (non-optimized) monetary policy rules. 2) The second novel contribution of this thesis is the (welfare) analysis of anticipated shocks under (optimal) monetary policy. We are able to show analytically within the canonical New Keynesian model that anticipated cost-push shocks generally entail higher welfare losses than unanticipated cost-push shocks of equal size. This result is then confirmed within a micro-founded and numerically calibrated hybrid New Keynesian model and within a non-linearized model for an oil-dependent economy. 3) This thesis adds to the literature on the interplay between monetary policy and oil price shocks by deriving the globally optimal Ramsey-type monetary policy for an oil-dependent economy. Our results contribute to the ongoing discussion whether the monetary policy amplifies or dampens the recessionary effects of oil price shocks by pointing out that the welfare-maximizing policy in fact calls for a sharp and prolonged output slump. In contrast, simple rules in the spirit of Taylor lead to a dampening of the output drop that is welfare-reducing. 4) As a methodological contribution, we show how to solve linear dynamic rational expectations models with optimal policy and anticipated shocks by using the generalized Schur decomposition method.



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Winkler, Roland: Anticipated shocks, optimal monetary policy, and welfare. 2009.


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