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Title:Cross-checking optimal monetary policy with information from the Taylor rule PDF Logo
Authors:Tillmann, Peter
Issue Date:2011
Series/Report no.:Joint discussion paper series in economics 32-2011
Abstract:This paper shows that monetary policy should be delegated to a central bank that cross-checks optimal policy with information from the Taylor rule. Attaching some weight to deviations of the interest rate from the interest rate prescribed by the Taylor rule is beneficial if the central bank aims at optimally stabilizing inflation and output gap variability under discretion. Placing a weight on deviations from a simple Taylor rule increases the overall relative weight of inflation volatility in the effective loss function, which reduces the stabilization bias of discretionary monetary policy. The welfare-enhancing role of this modified loss function depends on the size of the stabilization bias, i.e. on the degree of persistence in the cost-push shock process, and the relevance of demand shocks. These results can be interpreted in terms of the optimal composition of monetary policy committees.
Subjects:optimal monetary policy
stabilization bias
monetary policy delegation
robustness
Taylor rule
monetary policy committee
JEL:E43
E52
Document Type:Working Paper
Appears in Collections:MAGKS Joint Discussion Paper Series in Economics, Universität Marburg

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