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Monetary policy in an estimated optimization-based model with sticky prices and wages

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  • Jeffery D. Amato
  • Thomas Laubach

Abstract

This paper serves two purposes. First, it provides estimates of an optimization-based equilibrium model with sticky prices and wages. Second, the estimated model is used to analyze the welfare properties of various interest rate rules for conducting monetary policy. As shown by Erceg et al. (1999), an important feature of this model is that it involves a tradeoff between the variances of price and wage inflation and the output gap. This tradeoff implies that it is desirable for the monetary authority to respond to more than inflation, output, and past interest rates when setting the current interest rate. Indeed, the welfare optimal policy can be approximated with responses to both price and wage inflation and the past interest rate. By contrast, rules that call for a strong response to either detrended output or the output gap result in a much lower level of welfare.

Suggested Citation

  • Jeffery D. Amato & Thomas Laubach, 1999. "Monetary policy in an estimated optimization-based model with sticky prices and wages," Research Working Paper RWP 99-09, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:99-09
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    References listed on IDEAS

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    2. Julio J. Rotemberg & Michael Woodford, 1999. "Interest Rate Rules in an Estimated Sticky Price Model," NBER Chapters, in: Monetary Policy Rules, pages 57-126, National Bureau of Economic Research, Inc.
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    12. repec:bla:manchs:v:67:y:1999:i:0:p:1-35 is not listed on IDEAS
    13. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
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    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Jondeau, E. & Le Bihan, H., 2001. "Testing for a Forward-Looking Phillips Curve. Additional Evidence from European and US Data," Working papers 86, Banque de France.
    2. Jeffery D. Amato & Thomas Laubach, 1999. "Forecast-based monetary policy," Research Working Paper 99-10, Federal Reserve Bank of Kansas City.
    3. Argia M. Sbordone, 2002. "An optimizing model of U.S. wage and price dynamics," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    4. Coenen, Gunter & Wieland, Volker, 2005. "A small estimated euro area model with rational expectations and nominal rigidities," European Economic Review, Elsevier, vol. 49(5), pages 1081-1104, July.
    5. Erceg, Christopher J. & Levin, Andrew T., 2003. "Imperfect credibility and inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 915-944, May.
    6. Neiss, Katharine S. & Nelson, Edward, 2003. "The Real-Interest-Rate Gap As An Inflation Indicator," Macroeconomic Dynamics, Cambridge University Press, vol. 7(2), pages 239-262, April.
    7. Coenen, Gunter, 2007. "Inflation persistence and robust monetary policy design," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 111-140, January.
    8. Frank Smets & Raf Wouters, 2002. "Monetary policy in an estimated stochastic dynamic general equilibrium model of the Euro area," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    9. Gunter Coenen & Volker Wieland, 2000. "A Simple Estimated Euro Area Model With Rational Expectations And Nominal Rigidities," Computing in Economics and Finance 2000 187, Society for Computational Economics.
    10. Coenen, Gunter & Wieland, Volker, 2005. "A small estimated euro area model with rational expectations and nominal rigidities," European Economic Review, Elsevier, vol. 49(5), pages 1081-1104, July.
    11. Jean Boivin & Marc Giannoni, 2001. "Has monetary policy become less powerful?," Staff Reports 144, Federal Reserve Bank of New York.
    12. Giannoni, Marc P., 2002. "Does Model Uncertainty Justify Caution? Robust Optimal Monetary Policy In A Forward-Looking Model," Macroeconomic Dynamics, Cambridge University Press, vol. 6(1), pages 111-144, February.
    13. A. Lago Alves & Mirta N. S. Bugarin, 2006. "The Role of Consumer's Risk Aversion on Price Rigidity," Working Papers Series 121, Central Bank of Brazil, Research Department.
    14. Okano, Eiji, 2007. "Inflation-output trade-offs in an optimization-based econometric framework applied to an open economy: The case of Japan," Journal of Asian Economics, Elsevier, vol. 18(1), pages 98-124, February.
    15. Seonghoon Cho & Antonio Moreno, 2003. "A Structural Estimation and Interpretation of the New Keynesian Macro Model," Faculty Working Papers 14/03, School of Economics and Business Administration, University of Navarra.

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    Keywords

    Monetary policy; Prices; Wages;
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