A discretionary monetary policy leads to suboptimal stabilization in models with the New Keynesian assumption of forward-looking price setting, and various policy rules that improve the discretionary equilibrium have been considered in the literature. The empirical evidence for forward-looking price determination is mixed. This note shows, however, that forward-looking price setting is not essential for the results. Policy rules that improve welfare under the New Keynesian assumptions, also do so within a traditional backward-looking model if asset prices, such as the exchange rate, are forward-looking.
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Volume (Year): 15 (2005) Issue (Month): 16 (November) Pages: 1165-1170 Download reference. The following formats are available: HTML
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