A Toolkit for Computing Constrained Optimal Policy Projections (COPPs)

47 Pages Posted: 24 May 2021

See all articles by Oliver Groot

Oliver Groot

European Central Bank (ECB)

Falk Mazelis

European Central Bank (ECB)

Roberto Motto

European Central Bank (ECB)

Annukka Ristiniemi

Sveriges Riksbank; Paris School of Economics (PSE)

Date Written: May 1, 2021

Abstract

This paper presents a toolkit for generating optimal policy projections. It makes five contributions. First, the toolkit requires a minimal set of inputs: only a baseline projection for target and instrument variables and impulse responses of those variables to policy shocks. Second, it solves optimal policy projections under commitment, limited-time commitment, and discretion. Third, it handles multiple policy instruments. Fourth, it handles multiple constraints on policy instruments such as a lower bound on the policy rate and an upper bound on asset purchases. Fifth, it allows alternative approaches to address the forward guidance puzzle. The toolkit that accompanies this paper is Dynare compatible, which facilitates its use. Examples replicate existing results in the optimal monetary policy literature and illustrate the usefulness of the toolkit for highlighting policy trade-offs. We use the toolkit to analyse US monetary policy at the height of the Great Financial Crisis. Given the Fed’s early-2009 baseline macroeconomic projections, we find the Fed’s planned use of the policy rate was close to optimal whereas a more aggressive QE program would have been beneficial.

JEL Classification: C61, C63, E52, E58

Suggested Citation

Groot, Oliver and Mazelis, Falk and Motto, Roberto and Ristiniemi, Annukka, A Toolkit for Computing Constrained Optimal Policy Projections (COPPs) (May 1, 2021). ECB Working Paper No. 2021/2555, Available at SSRN: https://ssrn.com/abstract=3849839

Oliver Groot (Contact Author)

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Falk Mazelis

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Roberto Motto

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Postfach 16 03 19
D-60311 Frankfurt am Main
Germany

Annukka Ristiniemi

Sveriges Riksbank ( email )

SE-103 37 Stockholm
Sweden

HOME PAGE: http://www.ristiniemi.con

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

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