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Supply-side effects of monetary policy and the central bank’s objective function
Código: WPE – 123
This paper considers a new Keynesian model with the cost channel and evaluates the supply-side efects of monetary policy on macroeco- nomic volatility and welfare, taking into account the endogenous na- ture of the objective function of monetary authorities. When the cost channel matters, supply-side e¤ects of monetary policy depend on the degree of interest rate pass-through and the degree of price rigidity. Numerical results show that the welfare consequences of an increase in the degree of interest rate pass-through are independent of how the central bank specifies its loss function. By contrast, the welfare conse- quences of an increase in price rigidity depend critically on the nature of the loss function considered. Macroeconomic volatility as a func- tion of the pass-through is almost independent of the central bank’s loss function. In contrast, this volatility as a function of the degree of price rigidity depends more on the nature of the loss function.