Financial accelerator, linear-quadratic optimal policy, monetary policy rules.
In this paper we study linear-quadratic (LQ) optimal policy in an estimated euroarea DSGE model based on the model of Smets and Wouters (2003, 2005, 2007)augmented with the financial accelerator mechanism of Bernanke (1999).
We find that the LQ optimal policy is firmly accommodative if an adverse financial shock hits the economy. It generates above-the-target inflation rates in order to mitigate recessionary effects of the shock. It is more accommodative in the presence of financial frictions than a similar frictionless model. In the presence of adverse demand shocks, properties of the optimal policy are similar, although its inflationary effect becomes less significant. On the other hand, most supply shocks implie that the optimal policy in the presence of financial frictions is more restrictive than in the frictionless model.
We also show that simple rules approximating the LQ optimal policy improve welfare significantly relative to the empirical TAylor rule. However, optimized simple rules are not robust to changes of the distribution of exogenous rules if shocks ares considered separately, however, at an aggregare level the role of the premium becomes less significant.