IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

The science of monetary policy: A new Keynesian perspective

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.econ.upf.edu/docs/papers/downloads/356.pdf
File Function: Whole Paper
Download Restriction: no

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 356.

as
in new window

Length:
Date of creation: Sep 1997
Date of revision: Apr 1999
Handle: RePEc:upf:upfgen:356
Contact details of provider: Web page: http://www.econ.upf.edu/

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Lawrence J. Christiano & Christopher J. Gust, 1999. "Taylor rules in a limited participation model," Working Paper Series WP-99-3, Federal Reserve Bank of Chicago.
  2. Fuhrer, Jeffrey C & Moore, George R, 1995. "Monetary Policy Trade-offs and the Correlation between Nominal Interest Rates and Real Output," American Economic Review, American Economic Association, vol. 85(1), pages 219-39, March.
  3. William Kerr & Robert G. King, 1996. "Limits on interest rate rules in the IS model," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 47-75.
  4. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  5. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky Price and Limited Participation Models of Money: A Comparison," NBER Working Papers 5804, National Bureau of Economic Research, Inc.
  6. Romer, Christina D. & Romer, David H., 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," Department of Economics, Working Paper Series qt5h07k8vf, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  7. Damjanovic, Tatiana & Damjanovic, Vladislav & Nolan, Charles, 2008. "Unconditionally optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 491-500, April.
  8. Christopher J. Erceg & Andrew T. Levin, 2001. "Imperfect credibility and inflation persistence," Finance and Economics Discussion Series 2001-45, Board of Governors of the Federal Reserve System (U.S.).
  9. R. Barrell & R. Anderton & N. Vaughan & J.W. in't Veld, 1994. "The World Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 147(1), pages 30-49, February.
  10. Robert J. Gordon, 1996. "The Time-Varying NAIRU and its Implications for Economic Policy," NBER Working Papers 5735, National Bureau of Economic Research, Inc.
  11. Kai Leitemo & Ulf Söderström, 2005. "Robust monetary policy in the New-Keynesian framework," Macroeconomics 0508032, EconWPA.
  12. Lars E. O. Svensson, 1997. "Inflation Targeting: Some Extensions," NBER Working Papers 5962, National Bureau of Economic Research, Inc.
  13. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers 6768, National Bureau of Economic Research, Inc.
  14. Gauti B. Eggertsson, 2008. "Great Expectations and the End of the Depression," American Economic Review, American Economic Association, vol. 98(4), pages 1476-1516, September.
  15. Robert G. King & Alexander L. Wolman, 1996. "Inflation Targeting in a St. Louis Model of the 21st Century," NBER Working Papers 5507, National Bureau of Economic Research, Inc.
  16. Jeff Fuhrer & George Moore, 1995. "Inflation Persistence," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 127-159.
  17. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
  18. Stefan Krause, 2006. "Optimal monetary policy and the equivalency between the one-period AD-AS model and the forward-looking New Keynesian model," Applied Economics Letters, Taylor & Francis Journals, vol. 13(9), pages 541-544.
  19. Laurence Ball, 1997. "Efficient Rules for Monetary Policy," NBER Working Papers 5952, National Bureau of Economic Research, Inc.
  20. Hein, Eckhard & Schoder, Christian, 2009. "Interest rates, distribution and capital accumulation: A Post-Kaleckian perspective on the US and Germany," IPE Working Papers 04/2009, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
  21. N. Gregory Mankiw, 2006. "The Macroeconomist as Scientist and Engineer," Harvard Institute of Economic Research Working Papers 2121, Harvard - Institute of Economic Research.
  22. Bennett T. McCallum, . "The Alleged Instability of Nominal Income Targeting," GSIA Working Papers 1998-20, Carnegie Mellon University, Tepper School of Business.
  23. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
  24. Ben S. Bernanke & Ilian Mihov, 1996. "What Does the Bundesbank Target?," NBER Working Papers 5764, National Bureau of Economic Research, Inc.
  25. Ben S. Bernanke & Ilian Mihov, 1998. "Measuring Monetary Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 869-902.
  26. V.V. Chari & Lawrence J. Christiano & Martin Eichenbaum, 1996. "Expectation traps and discretion," Working Paper Series, Macroeconomic Issues WP-96-5, Federal Reserve Bank of Chicago.
  27. Dufour, Jean-Marie & Khalaf, Lynda & Kichian, Maral, 2013. "Identification-robust analysis of DSGE and structural macroeconomic models," Journal of Monetary Economics, Elsevier, vol. 60(3), pages 340-350.
  28. Carlstrom, Charles T. & Fuerst, Timothy S., 1995. "Interest rate rules vs. money growth rules a welfare comparison in a cash-in-advance economy," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 247-267, November.
  29. Stanley Fischer, 1995. "Modern Approaches to Central Banking," NBER Working Papers 5064, National Bureau of Economic Research, Inc.
  30. Rudebusch, Glenn D., 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 245-274, April.
  31. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-21, September.
  32. Giorgio Fagiolo & Andrea Roventini, 2008. "On the Scientific Status of Economic Policy: A Tale of Alternative Paradigms," LEM Papers Series 2008/03, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  33. Alexei Onatski & James H. Stock, 2000. "Robust Monetary Policy Under Model Uncertainty in a Small Model of the U.S. Economy," NBER Working Papers 7490, National Bureau of Economic Research, Inc.
  34. Ben S. Bernanke & Michael Woodford, 1997. "Inflation Forecasts and Monetary Policy," NBER Working Papers 6157, National Bureau of Economic Research, Inc.
  35. McCallum, Bennett T., 1997. "Crucial issues concerning central bank independence," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 99-112, June.
  36. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
  37. Montserrat Ferré, 2005. "Should Fiscal Authorities Co-operate in a Monetary Union with Public Deficit Targets?," Journal of Common Market Studies, Wiley Blackwell, vol. 43(3), pages 539-550, 09.
  38. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  39. Laurence Ball, 1992. "Disinflation With Imperfect Credibility," NBER Working Papers 3983, National Bureau of Economic Research, Inc.
  40. Mahir Binici & Yin-Wong Cheung, 2011. "Exchange Rate Dynamics under Alternative Optimal Interest Rate Rules," Working Papers 1116, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  41. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University.
  42. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
  43. John Y. Campbell, 1995. "Some Lessons from the Yield Curve," Harvard Institute of Economic Research Working Papers 1713, Harvard - Institute of Economic Research.
  44. Allen Head & Lucy Qian Liu & Guido Menzio & Randall Wright, 2011. "Sticky Prices: A New Monetarist Approach," NBER Working Papers 17520, National Bureau of Economic Research, Inc.
  45. Waltraud Schelkle & Anke Hassel, 2012. "The Policy Consensus Ruling European Political Economy: The Political Attractions of Discredited Economics," Global Policy, London School of Economics and Political Science, vol. 3, pages 16-27, December.
  46. Bennett T. McCallum & Edward Nelson, 1997. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," NBER Working Papers 5875, National Bureau of Economic Research, Inc.
  47. Stock, James & Feldstein, Martin, 1996. "Measuring Money Growth When Financial Markets are Changing," Scholarly Articles 2799053, Harvard University Department of Economics.
  48. R. Anderton & R. Barrell & G. Caporale, 1992. "The World Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 139(1), pages 27-45, February.
  49. Currie,David & Levine,Paul, 1993. "Rules, Reputation and Macroeconomic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521441964.
  50. Laurence Ball, 1998. "Policy Rules for Open Economies," NBER Working Papers 6760, National Bureau of Economic Research, Inc.
  51. Teruyoshi Kobayashi, 2005. "Optimal monetary policy and the role of hybrid inflation-price-level targets," Applied Economics, Taylor & Francis Journals, vol. 37(18), pages 2119-2125.
  52. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
  53. Feldstein, Martin & Stock, James H., 1996. "Measuring money growth when financial markets are changing," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 3-27, February.
  54. Bennett T. McCallum, 1997. "Issues in the Design of Monetary Policy Rules," NBER Working Papers 6016, National Bureau of Economic Research, Inc.
  55. Bernanke, Ben S. & Gertler, Mark & Waston, Mark, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Working Papers 97-25, C.V. Starr Center for Applied Economics, New York University.
  56. Svensson, Lars E O, 1995. "The Swedish Experience of an Inflation Target," CEPR Discussion Papers 1103, C.E.P.R. Discussion Papers.
  57. Benjamin M. Friedman & Kenneth N. Kuttner, 1996. "A Price Target for U.S. Monetary Policy? Lessons from the Experience with Money Growth Targets," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 77-146.
  58. Ben S. Bernanke & Jean Boivin, 2001. "Monetary Policy in a Data-Rich Environment," NBER Working Papers 8379, National Bureau of Economic Research, Inc.
  59. Yongsung Chang & Mark Bils, 2002. "Welfare Costs of Sticky Wages When Effort Can Respond," Macroeconomics 0204003, EconWPA.
  60. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  61. Junhan Kim, 2011. "Inflation Targeting as Constrained Discretion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(7), pages 1505-1522, October.
  62. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
  63. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  64. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, vol. 47(5), pages 1267-86, September.
  65. Arturo Estrella & Frederic S. Mishkin, 1996. "Is There a Role for Monetary Aggregates in the Conduct of Monetary Policy?," NBER Working Papers 5845, National Bureau of Economic Research, Inc.
  66. Paez-Farrell, Juan, 2012. "Should central bankers discount the future? A note," Economics Letters, Elsevier, vol. 114(1), pages 20-22.
  67. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the flow of funds," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
  68. Martin Feldstein, 1996. "The Costs and Benefits of Going from Low Inflation to Price Stability," NBER Working Papers 5469, National Bureau of Economic Research, Inc.
  69. Fuhrer, Jeffrey C, 1997. "Inflation/Output Variance Trade-Offs and Optimal Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(2), pages 214-34, May.
  70. Traficante, Guido, 2013. "Monetary policy, parameter uncertainty and welfare," Journal of Macroeconomics, Elsevier, vol. 35(C), pages 73-80.
  71. Jordi Galí, 1992. "How Well Does The IS-LM Model Fit Postwar U. S. Data?," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 709-738.
  72. Jensen, Christian, 2013. "The gains from short-term commitments," Journal of Macroeconomics, Elsevier, vol. 35(C), pages 14-23.
  73. Ireland, Peter N, 1996. "The Role of Countercyclical Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 704-23, August.
  74. Shouyong Shi, 2006. "A Microfoundation of Monetary Economics," Working Papers tecipa-211, University of Toronto, Department of Economics.
  75. Peter Tillmann, 2012. "Has Inflation Persistence Changed under EMU?," German Economic Review, Verein für Socialpolitik, vol. 13(1), pages 86-102, 02.
  76. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
  77. Pavel Kapinos & Michael S. Hanson, 2013. "Targets In The Taylor Rule: Inflation, Speed Limit, Or Price Level?," Contemporary Economic Policy, Western Economic Association International, vol. 31(1), pages 176-190, 01.
Full references (including those not matched with items on IDEAS)

This item is featured on the following reading lists or Wikipedia pages:

  1. Quantitative Macroeconomics and Real Business Cycles (QM&RBC)
  2. Nueva economía keynesiana in Wikipedia Spanish ne '')

When requesting a correction, please mention this item's handle: RePEc:upf:upfgen:356. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.