Affiliation:
1. MIT Department of Economics and NBER (email: )
2. Yale School of Management, NBER, and CEPR (email: )
Abstract
We study optimal monetary policy during temporary supply contractions when aggregate demand has inertia and the central bank is concerned about future constraints on expansionary policy. In this environment, it is optimal to run the economy hot until supply recovers. However, the policy does not remain loose throughout the low-supply phase. Overall, when the initial aggregate demand is low, the goal is to frontload the rate cuts to raise demand in anticipation of the recovery of supply. If inflation also has inertia, the central bank still overheats the economy during the low-supply phase but gradually cools it down over time. (JEL E12, E21, E23, E31, E43, E52)
Publisher
American Economic Association
Subject
Management, Monitoring, Policy and Law,Geography, Planning and Development
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