Monetary Policy as an Optimal Control Problem

Jan KODERA, Van Quang TRAN
2013 European Financial and Accounting Journal  
This paper analyses the monetary policy of a central bank in a simpledeterministic and continuous dynamic non-linear New-Keynesian modelwith an active central bank conducting monetary policy within inflationtargeting framework. To meet this purpose, first we derive twodifferential equations capturing the dynamics in the economy: thedynamic IS curve representing the commodity market and the Phillipscurve capturing the connection between the real and nominal sectors ofthe economy in a continuous
more » ... my in a continuous form. By introducing a quadratic lossfunction commonly used in New Keynesian Economics we get optimalcontrol problem which solution will be analysed with the use of fuzzycontrol. Then we introduce a modified form of the Taylor rule andanalyse the solution of the same differential equations capturing thedynamics of the economy using Taylor rule instead of loss function. Thecomparison of the solutions of both models will be demonstrated inexamples in which the main characteristic of dynamics of production andinflation are displayed.
doi:10.18267/j.efaj.94 fatcat:xarib7xo6vfh3eschmxqhawubq