This paper studies a general equilibrium model that is consistent with recent empirical evidence showing that the U.S. price level and in‡ation are much more responsive to aggregate technology shocks than to monetary policy shocks. Speci…cally, we show that the fact that aggregate technology shocks are more volatile than monetary policy shocks induces …rms to pay more attention to the former th...

Our objective in this paper has been to provide more theoretically coherent microfoundations for monetary policy rules in response to Lucas’s (1976) critique of econometric policy evaluation and, more importantly, to show that the Taylor rule can be derived via Friedman’s k% money supply rule. A key di¤erence with respect to the traditional IS-LM framework, is that, the aggregate decision rules...

Motivated by the difficulties of successfully operating a discretionary monetary policy, researchers and policymakers have become increasingly interested in the stabilization properties of a credible precommitment or rule on monetary policy. The theoretical and empirical effects of various monetary rules on real sector variables, such as employment and GNP, have been extensively studied [e.g., ...

Changes in monetary policy are typically implemented gradually, an empirical observation known as interest-rate smoothing. This finding is a puzzle for most monetary models because they predict an immediate response of monetary policy to macroeconomic developments. We propose an explanation of optimal interest-rate smoothing by applying the recent lesson from the related literature on the monet...

This study examines the usefulness of the Taylor-rule framework as an organizing device for describing the policy debate and evolution of monetary policy in the United States. Monetary policy during the 1920s and since the 1951 Treasury-Federal Reserve Accord can be broadly interpreted in terms of this framework with rather surprising consistency. In broad terms, during these periods policy has...

a r t i c l e i n f o JEL classification: E31 E44 E52 Keywords: Monetary policy rule Nonlinear model Stock market Structural break Time-varying coefficient This paper introduces nonlinearity and a structural break to the US forward-looking Taylor rule with a stock price gap, thereby alleviating the robustness problem that the linear Taylor rule is sensitive to minor changes of the sample period...

Monetary policy has an important role in the determination of the inflation rate and the output gap time trajectories. Monetary authorities should choose the nominal interest rate time path that best serves the goals of price stability (primarily) and output growth (as a consequence of the first). In this paper it is presented a framework under which an optimal interest rate rule is computed, a...

This article derives optimal fiscal rules within a stochastic model of Keynesian type in the context of Poole (1970) analysis. By using optimal control theory and applying the Hamilton-Jacoby-Bellman equation, we extend the original Poole results concerning the output stabilization properties of monetary policy to the case of fiscal policy. In particular, we look for the optimal setting of gove...

This paper considers the welfare consequences of two particularly simple rules for monetary policy: an interest rate peg and a money growth peg. The model economy consists of a real side that is the standard real business cycle model, and a monetary side that amounts to imposing cash-in-advance constraints on certain market transactions. The paper also considers the effect of assuming a rigidit...