The optimal inflation path in a Sidrauski-type model with uncertainty

Abstract

In this paper it is shown that in a Sidrauski-type model with uncertainty, the Chicago Rule remains valid as a prescription for the average rate of inflation, although there is a systematic difference between the perfect-foresight and the uncertainty case. Quantitatively, however, the difference turns out to be very small. The paper shows how to calculate the optimal monetary policy as a function of the state variables using the method of parameterized expectations. In terms of expected utility, the optimal policy is as good as the simple policy that reduces the money supply at the rate of time preference.