Following a policy rule mechanically when operating monetary policy is neither realistic nor practical. Nevertheless, monetary policy rules have received a great deal of attention in recent macroeconomic research. The paper focuses on a famous interest rate rule, namely the Taylor Rule, to show that the rule parameters are robust to most of the output gap measures and the specifications conside...

We develop a general framework to examine how the presence of a monetary transmission mechanism shapes aggregate responses to shocks and the effects of monetary policy. Our framework nests two leading monetary models: a text-book New Keynesian setting and a setting where small transactions costs associated with adjustments in households’ money balances lead to an evolving distribution of money ...

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...

The Federal Reserve system (the Fed) is the United States monetary policy authority and is mandated by Congress to pursue two goals: 1) maximum sustainable output and employment and 2) stable prices. Among the actions the Fed can take to achieve these goals is the ability to set the target federal funds rate. Simple policy rules that set the level of funds rate in response to changes in economi...

The EMU accession countries are obliged to fulfill the Maastricht convergence criteria prior to entering the EMU. What should be the optimal monetary policy satisfying these criteria? To answer this question, the paper proposes a DSGE model of a two-sector small open economy. First, I derive the micro founded loss function that represents the objective function of the optimal monetary policy no...

This paper considers a macroeconomic model with rational expectations in which prices are incompletely flexible. Markets therefore fail to clear. In such a model monetary policy is not neutral. The variance of real and nominal quantities and interest rates is sensitive to the parameters of the feedback rule that determines the money supply. The monetary policy that achieves the goat of minimizi...

This paper examines if US monetary policy responds to asset prices. Using real-time data we estimate a Taylor-type rule with an asset price variable. This variable refers to real estate prices, considering that those exhibit an important share in households’ asset portfolio. Moreover, especially real estate prices seem to have a close connection to monetary conditions. To analyze this link we d...

This paper studies the effects of monetary policy rules in a monetary union. The focus of the analysis is on the interaction between the fiscal policy of member countries (regions) and the central monetary authority. When capital markets are integrated, the fiscal policy of one country will influence equilibrium wages and interest rates. Thus there are fiscal spillovers within a federation. The...

In this paper, we estimate two small, forward-looking, macroeconomic models for the US and Germany and we compare the implied optimal monetary policy rules. Both models have a standard structure: an I-S curve, a Phillips curve, a short term interest-rate rule and a long term interest rate determined by the Expectations Hypothesis. They are intended to fit the data while allowing for some forwar...

Monetary policy is conducted in an environment of considerable uncertainty. In particular, Bernanke (2007) emphasizes that monetary authority faces substantial challenges in determining the sources of variation in macroeconomic variables. What can policy-makers do when supply and demand disturbances are unobserved and indistinguishable? Is a policy rule widely conducted otherwise still appropri...