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Title: A comparison of optimal policy rules prior to and during inflation targeting: empirical evidence from Bank of Canada
Authors: Ekşi, Ozan
Ekşi, Neslihan Kaya
Özlale, Ümit
Keywords: inflation targeting
taylor rule
linear-quadratic regulator problem
optimal monetary policy rule
Issue Date: 2017
Publisher: Routledge Journals, Taylor & Francis Ltd
Source: Eksi, O., Kaya Eksi, N., & Ozlale, U. (2017). A comparison of optimal policy rules prior to and during inflation targeting: empirical evidence from Bank of Canada. Applied Economics, 49(39), 3899-3911.
Abstract: We examine policy rules that are consistent with inflation targeting (IT) framework in a small macroeconomic model of the Canadian economy. We set up an optimal linear regulator problem and derive policy rules to compare the dynamics of pre-IT and IT eras. We find that while the optimal monetary policy rule in the pre-IT period is best described with a loss function that attaches equal weight to price stability, financial stability and output stability; the IT era is dominated by the price stability objective followed by the financial stability and output stability, consecutively. Moreover, we do not find an explicit role for exchange rate stability in the objective function of the Bank of Canada for both monetary policy eras. We, then, compare the properties of the derived optimal rules with those of an ad hoc Taylor rule for the IT period. In response to inflationary shocks, Taylor rule brings down inflation rates more quickly compared to the derived policy rules, but at the cost of a higher sacrifice ratio and more volatile interest rates.
ISSN: 0003-6846
Appears in Collections:İktisat Bölümü / Department of Economics
Scopus İndeksli Yayınlar Koleksiyonu / Scopus Indexed Publications Collection
WoS İndeksli Yayınlar Koleksiyonu / WoS Indexed Publications Collection

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