DP5609 Monetary Regimes: Is There a Trade-Off Between Consumption and Employment Variability?

Author(s): Kent Matthews, David Meenagh, Patrick Minford, Bruce Webb
Publication Date: April 2006
Keyword(s): heterogenous welfare, interest rate setting, money supply rules, price level targeting, robustness
JEL(s): E52
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5609

Macro models generally assume away heterogeneous welfare in assessing policies. We investigate here within two aggregative models - one with a representative agent, the other a long-used forecasting model of the UK - whether allowing for differences in welfare functions (specifically between those in continuous employment and those with frequent unemployment spells) alters the rankings of monetary policies. We find that it does but that a set of policies (money supply targeting implemented by money supply control) can be found that are robust in the sense of avoiding very poor outcomes for either of the two groups.