Template-Type: ReDIF-Paper 1.0
Author-Name: Zoltán M. Jakab
Author-X-Name-First: Zoltán M.
Author-X-Name-Last: Jakab
Author-Email: zoltan.jakab@mkkt.hu
Author-Workplace-Name: Office of Fiscal Council
Author-Name: Henrik Kucsera
Author-X-Name-First: Henrik
Author-X-Name-Last: Kucsera
Author-Email: kucserah@mnb.hu
Author-Workplace-Name: Magyar Nemzeti Bank
Author-Name: Katalin Szilágyi
Author-X-Name-First: Katalin
Author-X-Name-Last: Szilágyi
Author-Email: szilagyik@mnb.hu
Author-Workplace-Name: Magyar Nemzeti Bank
Author-Name: Balázs Világi
Author-X-Name-First: Balázs
Author-X-Name-Last: Világi
Author-Email: vilagib@mnb.hu
Author-Workplace-Name: Magyar Nemzeti Bank

Title: Optimal simple monetary policy rules and welfare in a DSGE Model for Hungary

Abstract: We explore the properties of welfare-maximizing monetary policy in a medium-scale DSGE model for Hungary. In order to make our results operational from a policymaker’s perspective, we approximate the optimal policy rule with a set of simple rules reacting only to observable variables. Our results suggest that “science of monetary policy” that is found robust in simple models, holds in this medium-scaled setting as well. That is, the welfare-maximizing policy that aims to eliminate distortions associated with nominal rigidities can be approximated by a simple inflation targeting rule. Adding exchange rate into the feedback rule only marginally improves the stabilization properties of the policy rule. However, a rule reacting to wage inflation can be significantly welfare-improving. These results may suggest that in our medium-sized model the distortions associated with sticky wage setting have at least as important welfare implications as those related to the price stickiness in product markets.

Length: 41 pages
Creation-Date: 2010
File-URL: http://www.mnb.hu/letoltes/wp-2010-4.pdf
File-Format: Application/pdf

Number: 2010/4
Classification-JEL: E52, E58, E61
Keywords: monetary policy, central banking, policy design
Handle: RePEc:mnb:wpaper:2010/4