Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/237694 
Year of Publication: 
2021
Series/Report no.: 
ECB Working Paper No. 2555
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
This paper presents a toolkit1 for generating optimal policy projections. It makes five contributions. First, the toolkit requires a minimal set of inputs: only a baseline projection for target and instrument variables and impulse responses of those variables to policy shocks. Second, it solves optimal policy projections under commitment, limited-time commitment, and discretion. Third, it handles multiple policy instruments. Fourth, it handles multiple constraints on policy instruments such as a lower bound on the policy rate and an upper bound on asset purchases. Fifth, it allows alternative approaches to address the forward guidance puzzle. The toolkit that accompanies this paper is Dynare compatible, which facilitates its use. Examples replicate existing results in the optimal monetary policy literature and illustrate the usefulness of the toolkit for highlighting policy trade-offs. We use the toolkit to analyse US monetary policy at the height of the Great Financial Crisis. Given the Fed's early-2009 baseline macroeconomic projections, we find the Fed's planned use of the policy rate was close to optimal whereas a more aggressive QE program would have been beneficial.
Subjects: 
Optimal monetary policy
Commitment vs. discretion
Lower bound
Asset purchases
Forward guidance puzzle
JEL: 
C61
C63
E52
E58
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-4555-4
Document Type: 
Working Paper

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