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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.

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

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Date of creation: Sep 1997
Date of revision: Apr 1999
Handle: RePEc:upf:upfgen:356
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  1. Bils, Mark & Chang, Yongsung, 2003. "Welfare costs of sticky wages when effort can respond," Journal of Monetary Economics, Elsevier, vol. 50(2), pages 311-330, March.
  2. Peter Tillmann, 2012. "Has Inflation Persistence Changed under EMU?," German Economic Review, Verein für Socialpolitik, vol. 13(1), pages 86-102, 02.
  3. 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.
  4. Leitemo, Kai & Söderström , Ulf, 2004. "Robust monetary policy in the New-Keynesian framework," Research Discussion Papers 31/2004, Bank of Finland.
  5. Mahir Binici & Yin-Wong Cheung, 2011. "Exchange Rate Dynamics Under Alternative Optimal Interest Rate Rules," Working Papers 362011, Hong Kong Institute for Monetary Research.
  6. Christopher J. Erceg and Andrew T. Levin, 2001. "Imperfect Credibility and Inflation Persistence," Computing in Economics and Finance 2001 19, Society for Computational Economics.
  7. 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.
  8. Gauti B. Eggertsson, 2005. "Great expectations and the end of the depression," Staff Reports 234, Federal Reserve Bank of New York.
  9. Junhan Kim, 2011. "Inflation Targeting as Constrained Discretion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(7), pages 1505-1522, October.
  10. 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.
  11. N. Gregory Mankiw, 2006. "The Macroeconomist as Scientist and Engineer," Harvard Institute of Economic Research Working Papers 2121, Harvard - Institute of Economic Research.
  12. Paez-Farrell, Juan, 2012. "Should central bankers discount the future? A note," Economics Letters, Elsevier, vol. 114(1), pages 20-22.
  13. Tatiana Damjanovic & Vladislav Damjanovic & Charles Nolan, 2007. "Unconditionally Optimal Monetary Policy," CDMA Working Paper Series 200721, Centre for Dynamic Macroeconomic Analysis.
  14. Shouyong Shi, 2006. "A Microfoundation of Monetary Economics," Working Papers tecipa-211, University of Toronto, Department of Economics.
  15. 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).
  16. 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.
  17. 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.
  18. G. Fagiolo & A. Roventini., 2009. "On the Scientific Status of Economic Policy: A Tale of Alternative Paradigms," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 6.
  19. 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.
  20. 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.
  21. Traficante, Guido, 2013. "Monetary policy, parameter uncertainty and welfare," Journal of Macroeconomics, Elsevier, vol. 35(C), pages 73-80.
  22. Bernanke, Ben S. & Boivin, Jean, 2003. "Monetary policy in a data-rich environment," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 525-546, April.
  23. Jensen, Christian, 2013. "The gains from short-term commitments," Journal of Macroeconomics, Elsevier, vol. 35(C), pages 14-23.
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