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Optimal monetary policy in an estimated SIR model

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  • Benmir, Ghassane
  • Jaccard, Ivan
  • Vermandel, Gauthier

Abstract

This paper studies the design of Ramsey optimal monetary policy in a Health New Keynesian (HeNK) model with Susceptible, Infected and Recovered (SIR) agents. The nonlinear model is estimated with maximum likelihood techniques on Euro Area data. Our objective is to deconstruct the mechanism by which contagion risk affects the conduct of monetary policy. If monetary policy is the only game in town, we find that the optimal policy features significant deviations from price stability to mitigate the effect of the pandemic. The best outcome is obtained when the optimal Ramsey policy is combined with a lockdown strategy of medium intensity. In this case, monetary policy can concentrate on its price stabilization objective. JEL Classification: E52, E32

Suggested Citation

  • Benmir, Ghassane & Jaccard, Ivan & Vermandel, Gauthier, 2023. "Optimal monetary policy in an estimated SIR model," Working Paper Series 2847, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20232847
    Note: 737337
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    Cited by:

    1. Trabandt, Mathias, 2023. "Comment on “Optimal monetary policy in an estimated SIR model by G. Benmir, I. Jaccard, and G. Vermandel”," European Economic Review, Elsevier, vol. 158(C).

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    More about this item

    Keywords

    Covid-19; HeNK; macroeconomic trade-offs; nonlinear inference; Tin-bergen principle;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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