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Monetary Policy Rules in a New Keynesian Euro Area Model
Author(s) -
CASARES MIGUEL
Publication year - 2007
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2007.00049.x
Subject(s) - economics , new keynesian economics , monetary policy , inflation (cosmology) , interest rate , nominal interest rate , inflation targeting , keynesian economics , taylor rule , macroeconomics , smoothing , wage , monetary economics , simple (philosophy) , macroeconomic model , econometrics , central bank , real interest rate , computer science , market economy , philosophy , physics , epistemology , theoretical physics , computer vision
The first part of this paper is devoted to describe a New Keynesian model, which, after calibration, shows a great fit on Euro area macroeconomic data. Then, the stabilizing properties of alternative monetary policy rules are evaluated for consideration of the European Central Bank (ECB). Our main finding is that a simple rule that provides the reaction of the nominal interest rate to price inflation, wage inflation, and its previous observation can fairly well approximate the optimal monetary policy. This result is robust to including an ECB preference on interest‐rate smoothing.