Monetary policy under a New Keynesian perspective

• Main Author: Montoro, Carlos
• Published: London School of Economics and Political Science (University of London) 2007
• Subjects: 332.4
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.645645

This thesis studies monetary policy in a dynamic general equilibrium framework with nominal price rigidities. It analyses monetary policy in a non-linear environment and explores issues concerning optimal monetary policy. The introductory chapter sets out the motivation of the thesis and puts it into the framework of the existing literature. Chapter 2 provides a New Keynesian framework to study the interaction among oil price volatility, firms' pricing behaviour and monetary policy. We show that when oil is difficult to substitute in production, firms find optimal to charge higher relative prices as a premium in compensation for the risk that oil price volatility generates on their marginal costs. Chapter 3 uses the model laid out chapter 2 to investigate how monetary policy should react to oil shocks. The main result is oil price shocks generate a trade-off between inflation and output stabilisation when oil has low substitutability in production. Therefore it becomes optimal to the monetary authority to react partially to oil shocks and some inflation is desirable. In chapter 4 we extend a New Keynesian model considering preferences that exhibit intertemporal non-homotheticity. We show that under this framework the intertemporal elasticity of substitution becomes state dependent, which induces asymmetric shifts in aggregate demand in response to monetary policy shocks In chapter 5 we extend the New Keynesian Monetary Policy literature relaxing the assumption that decisions are taken by a single policymaker, considering instead a Monetary Policy Committee (MPC) whose members have different preferences between output and inflation stabilisation. We show that under this framework, the interest rate behaves non-linearly upon the lagged interest rate and expected inflation.