Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5098568 | Journal of Economic Dynamics and Control | 2014 | 36 Pages |
Abstract
This paper examines optimal monetary policy in a New Keynesian model where supply and demand shocks affect the price of oil. Optimal policy fully stabilizes core inflation when wages are flexible. The nominal rate rises (falls) in response to the demand (supply) shock. With sticky wages core inflation falls (rises) in response to the demand (supply) shock. Impulse response functions from a VAR estimated with post-1986 U.S. data show minimal movement in core inflation in response to both shocks. The federal funds rate rises (falls) in response to the demand (supply) shock, consistent with the predictions from the theoretical model for policy that stabilizes core inflation.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Michael Plante,