Three Essays on Monetary Policy Rules

The three chapters of my dissertation investigate various aspects of monetary policy rules using the New-Keynesian model. Chapter one discuss monetary policy rules that best achieves the goal of the inflation targeting framework, namely, price stability and output gap stabilization. Previous literature suggests that domestic inflation targeting is optimal when there exists no trade-off between inflation and output gap stabilization. I incorporate both exogenous and endogenous cost push shocks into the model to investigate whether domestic inflation targeting continues to dominate other policy rules. Results show that inflation targeting rules (domestic inflation or CPI inflation) continue to dominate other policy rules under several specifications of the economy. It also shows that estimated Taylor-type instrument rules outperform forward-looking instrument rules. The second chapter estimates the New Keynesian model with a new output gap measure (real marginal cost), suggested by past studies such as Gali and Gertler (1999). We show that IS curve, in addition to the Phillips curve is more realistically estimated with the new output gap measure than the traditional output gap measure (deviations from detrended output) suggesting that the new output gap measure might be more close to the true output gap measure. However estimates of the policy rule suggest that the monetary authority has not been stabilizing the new output gap measure. These results imply that such policy rules could lead to significant welfare loss to the economy. The last chapter examines the consequences of targeting a wrong measure of potential output. We find that the optimal policy under targeting the incorrect output gap measure is not responding to such output gap measure at all. We also find that unless the targeted output gap measure is very close to the true output gap measure the optimal response remains unchanged.

Name thesis:degree_name

Ph.D.

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Economics

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2015

Author dc:creator

• Lee, Yoon Sok

Contributors dc:contributor

• Soyoung Kim

• Economics, Finance

Language dc:language

eng

Identifier

(MiAaPQ)AAI3199061

OAI identifier oai:identifier

oai:www.ideals.illinois.edu:2142/85557