Monetary Stabilisation with Nominal Asymmetries*

Optimal monetary stabilisation in the standard New Keynesian framework usually assumes a policy loss function from outside the model. In this paper, in contrast, the objective arises directly from the model. Credit constraints and sticky nominal debt contracts imply that monetary stabilisation has asymmetric impacts depending on whether consumers are creditconstrained. The policy problem is to maximise some weighting of the expected utility of the different types of consumer. Features of optimal stabilisation are derived that do not appear to be far out of line with empirical evidence for many countries but that clearly conflict with standard loss function results.