Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5099295 | Journal of Economic Dynamics and Control | 2010 | 10 Pages |
Abstract
Since Kydland and Prescott (1977) and Barro and Gordon (1983), most studies of the problem of the inflation bias associated with discretionary monetary policy have assumed a quadratic loss function. We depart from the conventional linear-quadratic approach in favor of a projection method approach. We investigate the size of the inflation bias that arises in a microfounded nonlinear environment with Calvo price setting. The inflation bias is found to lie between 1% and 6% for a reasonable range of parameter values, when the bias is defined as the steady-state deviation of the discretionary inflation rate from the optimal inflation rate under commitment.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Gary S. Anderson, Jinill Kim, Tack Yun,