Rational expectations and optimal monetary policy: estimates for Brazil and the U.S.
DOI:
https://doi.org/10.11606/1443-8050/ea217554Keywords:
second-order Phillips curve, rational expectations, generalized methods of moments, optimal monetary policyAbstract
This paper uses Taylor's macroeconomic model with rational agents. The model is designed to allow the researcher to estimate aggregate demand and price equations under rational expectations and some inflexibility in wage adjustment arising from contracts. The generalized method ofmoments is applied to estimate the model for the Brazilian and U.S. economies in the period 1973-85. Government monetary policy functions based on losses arising from inflation and unemployment are then used to construct a second-order Phillips curve, which shows the different variances of inflation and unemployment that are optimal depending on loss function weights. The main conclusions are that there is a tradeoff between the variabilities of inflation and output in both economies, and that monetary policies were not optimal in either economy during the period.
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