This paper derives a closed-form solution for the optimal discretionary monetary policy in a small macroeconomic model that allows for varying degrees of forward-looking behavior. We show that a more forward-looking aggregate demand equation serves to attenuate the response to inflation and the output gap in the optimal interest rate rule. In contrast, a more forward-looking real interest rate equation serves to magnify the response to both variables. A more forward-looking Phillips curve serves to attenuate the response to inflation but magnifies the response to the output gap. ; Original title: Forward-looking behavior and the optimality of the Taylor rule.
Trehan, Bharat, and Kevin J. Lansing. 2001. “Forward-Looking Behavior and the Optimality of the Taylor Rule,” Federal Reserve Bank of San Francisco Working Paper 2001-03. Available at https://doi.org/10.24148/wp2001-03