Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/83592
Authors: 
Jakab, Zoltán M.
Kucsera, Henrik
Szilágyi, Katalin
Világi, Balász
Year of Publication: 
2010
Series/Report no.: 
MNB Working Papers 2010/4
Abstract: 
We explore the properties of welfare-maximizing monetary policy in a medium-scale DSGE model for Hungary. In order to make our results operational from a policymaker's perspective, we approximate the optimal policy rule with a set of simple rules reacting only to observable variables. Our results suggest that 'science of monetary policy' that is found robust in simple models, holds in this medium-scaled setting as well. That is, the welfare-maximizing policy that aims to eliminate distortions associated with nominal rigidities can be approximated by a simple inflation targeting rule. Adding exchange rate into the feedback rule only marginally improves the stabilization properties of the policy rule. However, a rule reacting to wage inflation can be significantly welfare-improving. These results may suggest that in our medium-sized model the distortions associated with sticky wage setting have at least as important welfare implications as those related to the price stickiness in product markets.
Subjects: 
monetary policy
central banking
policy design
JEL: 
E52
E58
E61
Document Type: 
Working Paper

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