Speed limit policies : the output gap and optimal monetary policy

Carl E. Walsh

In a standard New Keynesian model, a myopic central bank concerned with stabilizing inflation and changes in the output gap will implement a policy under discretion that replicates the optimal, timeless perspective, precommitment policy. By stabilizing output gap changes, the central bank imparts inertia into output and inflation that is absent under pure discretion. Even a fully optimizing (i.e., non-myopic) central bank operating in a discretionary policy environment achieves better social outcomes if it focuses on inflation and changes in the output gap than are achieved under inflation targeting.

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Year of publication:	2001
Authors:	Walsh, Carl E.
Publisher:	München : CESifo
Subject:	monetary policy \| inflation targeting \| targeting regimes \| Geldpolitik \| Monetary policy \| Inflationssteuerung \| Inflation targeting \| Theorie \| Theory \| Geldpolitisches Ziel \| Monetary target \| Neoklassische Synthese \| Neoclassical synthesis \| Regelbindung versus Diskretion \| Rules versus discretion \| Vergleich \| Comparison \| Kapazitätsauslastung \| Capacity utilization