Starting a new paper, and a co-author (unfamiliar with Dynare) is interested in a monetary policy that can “bring inflation down to target in X years" following a shock. Does anyone have any experience with how to do this in Dynare (and if this is at all possible)?
At this point, we are hoping for a modification to a standard Taylor rule (interest rate reacts to inflation and/or output gap and/or exchange rate) that can add this time-constraint consideration to the model.
Thank you!
I am not sure that is feasible. The Taylor rule is a feedback rule that is not contingent on the type of shock and which usually bring inflation back to steady state at a geometrically decaying rate, i.e. only asymptotically.
What you seem to have in mind is a particular reaction that achieves an exact 0 in finite time, regardless of the initial impulse. I don’t think a standard policy reaction function will be able to do this, particularly as different shocks would require a different type of policy response to achieve this.
Thank you! That was my suspicion as well.
For anyone following this thread, I think we’ll proceed with a parameter search workaround (i.e., what value of the coefficient on inflation or output gap or any other target) can bring inflation down to within x% of the target within T periods.