Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/319974 
Authors: 
Year of Publication: 
2014
Series/Report no.: 
CASMEF Working Paper Series No. WP 2014/08
Publisher: 
LUISS Guido Carli, Department of Economics and Business, Arcelli Centre for Monetary and Financial Studies, Rome
Abstract: 
We extend Svensson's (Svensson, 1997) model of optimal monetary policy to the case in which the monetary authorities are pessimistic. With respect to his formulation we show that: i) the inflation forecast is no longer an explicit intermediate target; ii) the monetary authorities move their instruments to hedge against the worst economic shocks, do not expect the inflation rate to mean revert to its first-best level and apply a more aggressive Taylor rule; and iii) the inflation rate is less volatile. Our conclusions also hold when the monetary authorities observe inflation and output gap with a time lag. Our analysis extends the analysis of van der Ploeg (van der Ploeg, 2009), as we allow for time-discounting of future social welfare losses due to deviations of output and inflation from first-best values.
Subjects: 
Monetary Policy
Pessimism
Discounted Linear Exponential Quadratic Gaussian
JEL: 
C61
E52
E58
Document Type: 
Working Paper

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