Optimal Monetary Policy

Optimal government spending at the zero lower bound: A non-Ricardian analysis

“…1 In order to focus on the economy's response to the discount rate shock, I will take a timeless perspective and modify the government's problem so as to eliminate the initial dynamics that would prevail even in the absence of any shock. Specifically, following Khan, King, and Wolman (2003), the government's objective function is modified to include penalty terms involving hypothetical time-zero Lagrange multipliers. 2 Given the initial debt, b 0 , the modified objective function of the government is given by…”

Optimal fiscal and monetary policy when money is essential

“…We conduct 1000 simulations of 500 periods each and discard the first 100 periods. As in Khan, King, and Wolman (2003) and others, we assume that the initial state of the economy is the asymptotic Ramsey steady state. For each simulation, we then compute first and second moments and report the averages of these moments over the 1000 simulations.…”

Monetary policy, doubts and asset prices

“…and a monetary policy rule, an equilibrium is an allocation of quantities and prices (7), (8), (12), (14), (18), (19), (21), (24), (27), (28), (29), (30), (31) hold, considering the definitions of the following variables  +1 ,    ,    which are given in the text, and considering that the distorted expectation operator is related to the reference expectation operator through (3).…”

“…In particular, we are interested in characterizing the optimal policy under commitment. The policymaker seeks to maximize (32) by choosing the sequences (7), (8), (12), (14), (18), (19), (21), (24), (27), (28), (29), (30), (31) given the processes for the stochastic disturbance {  } and initial conditions (∆  0 −1 ,   0 −1 ), considering the definitions of the variables  +1 and    in (10) and (13), given the relationship between leisure and labor   = 1 −   and considering that the distorted expectation operator is related to the "reference" expectation operator through (3) 8 This Ramsey optimal policy problem is clearly time-inconsistent because of the presence of forward-looking constraints (12), (18), (27), (28), therefore it cannot be written in a recursive form. This is not really an issue if we could solve the optimization problem in a non-linear way.…”

“…See Barillas et al (2009) for the ability of this framework to reproduce realistic values for the equity premium and the price of risk. 3 For an overview of the main results of the literature see Benigno and Woodford (2005), Khan et al (2003) and the recent review of Woodford (2009b). 1 more expansionary policy is optimal because it can correct for the inefficiencies due to monopolistic competition by raising average output while keeping average inflation low, thanks to the flattening of the trade-off between average inflation and average output.…”