Optimal simple monetary policy rules and welfare in a DSGE model for Hungary

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: MNB Working Papers ; No. 2010/4

Classification and Topics

• Classification: Wirtschaft ; Monetary Policy ; Central Banks and Their Policies ; Policy Objectives; Policy Designs and Consistency; Policy Coordination
• Subject: monetary policy ; central banking ; policy design

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Jakab, Zoltán M. ; Kucsera, Henrik ; Szilágyi, Katalin ; Világi, Balász
• Event: Veröffentlichung
• (who): Magyar Nemzeti Bank
• (where): Budapest
• (when): 2010

Further information

• Handle: http://hdl.handle.net/10419/83592
• Last update: 10.03.2025, 11:43 AM CET