Monetary policy analysis in a new keynesian model with money

Abstract

This paper examines the stabilizing performance of two alternative monetary policy rules, being the first one based on the nominal interest rate and the second one on the rate of nominal money growth. The analysis is based on a calibrated New Keynesian model with money. The model includes several features such as a transaction cost technology, sticky prices and a monopolistic competitive industry. The methodology entails an analysis of the performance of two monetary policy regimes, where we evaluate social welfare from the expected household intertemporal utility. We seek for the optimized coefficient on the response of the policy instrument to inflation deviations and compare the results between the policy rules as well as with the baseline calibration. The results obtained show that the optimized Taylor rule is obtained with a coefficient on inflation equal to 4, which outperforms the original Taylor (1993) rule coefficient of 1.5. In a nominal money growth rule, the optimized coefficient on inflation is significantly higher (around 11) and the social welfare obtained is slightly lower than in the case of an interest-rate rule.