Discretion and the transmission lags of monetary policy

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Title: Discretion and the transmission lags of monetary policy
ISBN: 978-952-462-362-9
978-952-462-363-6
Author: Kilponen, Juha ; Leitemo, Kai
Organization: Suomen Pankki
Series: Suomen Pankin keskustelualoitteita
ISSN: 0785-3572
Series year: 2007
Series number: 8/2007
Year of publication: 2007
Published in: Published in Journal of Economic Dynamics and Control, Volume 35, Issue 4, April 2011: 565-578
DOI: 10.1016/j.jedc.2010.12.011
Keywords: rahapolitiikka; tavoitteet; inflaatio; mallit; korot; hinnat; viiveet; sopeutuminen; välittyminen
JEL: E52; E58; E61
Abstract: Monetary policy transmission lags create credibility problems for the inflationtargeting policy maker who acts under discretion. We show that if prices react to monetary policy with a longer lag than output, the welfare maximizing inflationtargeting policy implies no policy stabilization of cost-push shocks in the canonical New Keynesian model. The reason is simple: for the period monetary policy influences output, inflation is predetermined and the best discretionary policy is to stabilize the output gap fully. We find that money growth targeting comes close to replicating the welfare-maximizing policy under commitment if there are transmission lags. Keywords: discretionary and stabilization bias, monetary policy, transmission lags, inflation targeting, money targeting JEL classification numbers: E52, E58, E61
Rights: https://helda.helsinki.fi/bof/copyright


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