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Policy Maker’s Credibility with Predetermined Instruments for Forward-looking Targets
[Politiques crédibles avec des instruments prédéterminés pour des cibles non-prédéterminées]

Author

Listed:
  • Jean-Bernard Chatelain

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Kirsten Ralf

    (ESCE – International Business School)

Abstract

The aim of the present paper is to provide criteria for a central bank of how to chooseamong different monetary-policy rules when caring about a number of policy targetssuch as the output gap and expected inflation. Special attention is given to the questionif policy instruments are predetermined or only forward looking. Using the new-Keynesian Phillips curve with a cost-push-shock policy-transmission mechanism, theforward-looking case implies an extreme lack of robustness and of credibility of stabi-lization policy. The backward-looking case is such that the simple-rule parameters canbe the solution of Ramsey optimal policy under limited commitment. As a conse-quence, we suggest to model explicitly the rational behavior of the policy maker with Ramsey optimal policy, rather than to use simple rules with an ambiguous assumptionleading to policy advice that is neither robust nor credible.

Suggested Citation

  • Jean-Bernard Chatelain & Kirsten Ralf, 2020. "Policy Maker’s Credibility with Predetermined Instruments for Forward-looking Targets [Politiques crédibles avec des instruments prédéterminés pour des cibles non-prédéterminées]," PSE-Ecole d'économie de Paris (Postprint) halshs-03029893, HAL.
    • Handle: RePEc:hal:pseptp:halshs-03029893
    DOI: 10.2139/ssrn.3743010
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    1. Buiter,Willem H. & Marston,Richard C., 1986. "International Economic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521337809, October.
    2. Jean-Bernard Chatelain & Kirsten Ralf, 2019. "A Simple Algorithm for Solving Ramsey Optimal Policy with Exogenous Forcing Variables," Economics Bulletin, AccessEcon, vol. 39(4), pages 2429-2440.
    3. Chatelain, Jean-Bernard & Ralf, Kirsten, 2022. "Ramsey Optimal Policy In The New-Keynesian Model With Public Debt," Macroeconomic Dynamics, Cambridge University Press, vol. 26(6), pages 1588-1614, September.
    4. Chatelain, Jean-Bernard & Ralf, Kirsten, 2018. "Publish and Perish: Creative Destruction and Macroeconomic Theory," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 46(2), pages 65-101.
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    14. Chatelain, Jean-Bernard & Ralf, Kirsten, 2020. "Ramsey Optimal Policy versus Multiple Equilibria with Fiscal and Monetary Interactions," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 40(1), pages 140-147.
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    19. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
    20. Jean-Bernard Chatelain & Kirsten Ralf, 2018. "Publish and Perish: Creative Destruction and Macroeconomic Theory," Post-Print halshs-01884160, HAL.
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    1. Chatelain, Jean-Bernard & Ralf, Kirsten, 2021. "Hopf Bifurcation From New-Keynesian Taylor Rule To Ramsey Optimal Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 25(8), pages 2204-2236, December.

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    More about this item

    Keywords

    Determinacy; Proportional Feedback Rules; Dynamic Stochastic General Equilibrium; Ramsey Optimal Policy under Quasi-Commitment; Détermination; Règles de rétroaction proportionnelles; Politique de Ramsey avec engagement; Modèle d’équilibre général dynamique et stochastique;
    All these keywords.

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Econometrics; Quantitative and Mathematical Studies
    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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