This paper reviews the recent literature on monetary policy rules. We
exposit the monetary policy design problem within a simple baseline
theoretical framework. We then consider the implications of adding
various real world complications. Among other things, we show that
the optimal policy implicitly incorporates inflation targeting. We
also characterize the gains from making credible commitments to fight
inflation. In contrast to conventional wisdom, we show that gains
from commitment ...
This paper reviews the recent literature on monetary policy rules. We
exposit the monetary policy design problem within a simple baseline
theoretical framework. We then consider the implications of adding
various real world complications. Among other things, we show that
the optimal policy implicitly incorporates inflation targeting. We
also characterize the gains from making credible commitments to fight
inflation. In contrast to conventional wisdom, we show that gains
from commitment may emerge even in the central bank is not trying to
inadvisedly push output above its natural level. We also consider the
implications of frictions such as imperfect information.
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