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Please use this identifier to cite or link to this item: http://hdl.handle.net/2108/288

Title: Structural breaks and optimal monetary policy
Authors: Mattesini, Fabrizio
Nisticò, Salvatore
Keywords: balanced growth
optimal monetary policy
structural breaks
Issue Date: Jul-2006
Publisher: CEIS
Series/Report no.: Quaderni CEIS; 237
Abstract: This paper analyzes the optimal behavior of the Central Bank in an economy characterized by balanced growth. Consistently with the view of Perron (1989) and differently from the standard approach in DNK literature, we model the dynamics of productivity as following a trend-stationary model subject to infrequent breaks; accordingly we characterize periods of productivity slowdown as structural breaks in trend-growth. We show that breaks in trend-growth affect the dynamics of inflation, the preferences of a welfare-maximizing Central Bank and optimal monetary policy. We show that in periods of productivity slowdown, optimal monetary policy should not only guarantee the appropriate response to productivity shocks, but also take into consideration the change in trend-growth in responding to cost-push shocks. Moreover, we show that during productivity slow-downs the gains from commitment are higher than during phases of high productivity growth, while the consequences of a discretionary pol...
URI: http://hdl.handle.net/2108/288
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