Optimal sustainable monetary policy

In recent monetary policy literature, optimal commitment policy or its variant from a timeless perspective has been studied with emphasis on welfare gains from policy com-mitment, regardless of its time consistency problem called a stabilization bias. With an optimizing model used in the literature, we examine sustainable equilibrium of Chari and Kehoe (1990) and study optimal sustainable policy, the policymaker’s strategy in the best sustainable equilibrium. In the absence of commitment technologies, calibrated versions of the model show that the Ramsey equilibrium generated by optimal commitment policy is not achievable, suggesting that optimal sustainable policy is the desirable policy benchmark. From the viewpoint of policy operationality, the latter policy involves some issues due to its dependence on the entire history of Lagrange multipliers on a sustainability constraint. As a guidepost for actual policy conduct that contains no such issues and attains higher social welfare than discretionary policy does, we propose a sustainable policy conducted by following a policy rule that achieves the best Markov equilibrium