Abstract
This paper presents an optimal discretionary policy rule, which is derived from a hybrid New-Keynesian model with rational expectations, and applies it to Israel. Comparison of the optimal rule to a forecast-based expanded Taylor rule under the same model results in a similar impulse-response function of a shock to inflation and a shock to the exchange rate; however, the impulse-response function to the output gap is more moderate when the monetary policy rule is optimal.
The introduced optimal monetary policy rule may be one of the indicators in the monetary policy discussions, and may help to characterize the preferences of the monetary authority.