Economics, Econometrics and Finance
4 years ago

Optimal monetary policy reduces inflation risk by an order of magnitude.

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Macroeconomic Dynamics
INFLATION RISK AND OPTIMAL MONETARY POLICY
William T. Gavin, Benjamin D. Keen, Michael R. Pakko

Paper Summary

The study shows that following certain monetary policies can lead to high inflation risk. By adjusting the rules to focus on a price path, the economy can lower long-term inflation risk significantly. This change reduces inflation variability by a lot more than it increases output gap variability.

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