Repository: City University of New York (CUNY), The Graduate Center: Academic Works
One reason of the criticism about Taylor rule would be that the rule could not provide a micro foundation about the decision-making mechanism. because it is simply describing the policy process in terms of the short-term nominal interest rate. In order to reconcile the tension between critics and supporters of Taylor rule, chapter I employs the theory of team, which investigates how members in a team interact to determine optimal decisions. Using team theory, it is shown how optimal monetary policy is results from committee members' interactions. In chapter II, if the government cannot recognizes that the monetary policy can affect the economy with a lag or if observed data for decision-making is real-time data, following Orphanides (2001, 2003), this policy is not effective as much as their expectation. From Friedman's metaphor of "Fool in the shower", it is reasonable to include time lags in committee decision-making. In chapter II, including lags in the information structure, recognition and administrative lags, optimal inertial monetary policy is derived. In chapter III, FIML and SUR are employed to check if the actual data support the optimal monetary policy obtained under committee decision-making. The empirical evidence supports the inclusion of the lagged interest rate and the persistent shock in errors.