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s of Articles Accepted in Journals, Books, and Conference Volumes 55 An important issue in small open economies is whether policymakersshould respond to exchange rate movements when they formulate mone-tary policy. Microfounded models tend to suggest that there is little to begained from responding to exchange rate movements, and the literature haslargely concluded that such a response is unnecessary, or even undesirable.This paper examines this issue using an estimated model of the Australianeconomy. In contrast to microfounded models, according to this modelpolicymakers should allow for movements in the real exchange rate andthe terms-of-trade when they set interest rates. Further, taking real ex-change rate movements into account appears even more important withprice level targeting than with inflation targeting. This paper presents algorithms that solve for optimal simple monetarypolicy rules in rational expectations models with precommitment and dis-cretion. The algorithms are applied to the models in Fuhrer (1997), Claridaet al. (1999), and Rudebusch (2002) to examine the efficiency properties ofoperational policy rules. We show that optimized Taylor-type rules performwell in these models, but that, aside from the Fuhrer-Moore model, thisresult is sensitive to whether the central bank can respond to current periodshocks. Taylor-type rules that are operational in the sense that they do notrespond to current period information are found to be highly inefficient inthe Rudebusch model and in the Clarida et al. model. This paper examines the prices for communications equipment, an impor-tant component of information technology. Unlike prices for computers,which officially fall sharply every year, the official prices for communica-tions equipment have barely budged over the past decade. This papercombines earlier work on prices for several segments of communicationsequipment with new results for public exchanges, fiber-optic equipment,and modems. The results suggest that prices for communications equip-ment fall much faster than official statistics would indicate, but not as fastas computers. The results presented in this paper, if incorporated into theNational Income and Product Accounts, would decrease multifactor pro-ductivity growth by about 0.1 percentage point per year and increase thecontribution of capital deepening by a like amount. Also, GDP growthwould be boosted marginally.Exploring the Roleof the Real Exchange Ratein Australian Monetary Policy