New study reveals optimal monetary policy strategies for global economic stability
The strength of the cost channel of monetary policy varies between countries. In a two-country monetary union, this affects how optimal monetary responses to shocks should be. The cost channel makes monetary policy less effective in controlling inflation, but using the instrument more strongly can help. A larger cost channel difference means less aggressive optimal monetary policy. Overall, committing to a policy works best, followed by the Taylor rule, then strict inflation targeting, and finally discretion.