This paper investigates optimal monetary policy rules when two large countries simultaneously face non-negativity constraints on nominal interest rates. Under policy coordination, domestic optimal monetary policy rules depend on domestic endogenous variables, foreign inflation, and domestic and foreign policy rates when the zero lower bound is never binding. Such policy rules generally lose the...

M any central banks have long used a short-term nominal interest rate as the main instrument through which monetary policy actions are implemented. Some monetary authorities have even viewed their main job as managing nominal interest rates, by using an interest rate rule for monetary policy. It is therefore important to understand the consequences of such monetary policies for the behavior of ...

The considerable amount of research in recent years on New Keynesian, open-economy models -models with nominal price rigidities and intertemporally maximizing agents -has yielded fresh insights for what Alan Blinder has called the “dark art” of making monetary policy. The literature has made its greatest contributions in understanding the transmission of shocks across countries, exchange rate p...