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...

How does an unexpected domestic monetary expansion affect the foreign economy? Does it induce an increase or a decline in foreign production? In the traditional two-country Mundell-Fleming model, monetary policy has «beggar-thy-neighbor» effects. Yet, empirical evidence from VARs indicates that U.S. monetary policy has positive international transmission effects on both foreign (non-U.S. G-7) o...

Forecast targeting,” forward-looking monetary policy that uses central-bank judgment to construct optimal policy projections of the target variables and the instrument rate, may perform substantially better than monetary policy that disregards judgment and follows a given instrument rule. This is demonstrated in a few examples for two empirical models of the U.S. economy, one forward looking an...

Whether a monetary policy (rule) aiming at stabilizing the economy efficiently should take exchange rate movements into consideration is an issue that recently has drawn a lot of attention. So far, however, no persuasive empirical evidence on the topic has been provided. Using well-established long-run economic equilibrium conditions building on traditional monetary views and by using cointegra...

Exchange rates forecasting performance is tested by a model which incorporates endogenous monetary policy through a Taylor rule reaction function. Other usual monetary and equilibrium empirical exchange rate models are also evaluated for comparison purposes. Predictability is tested by comparing the models to a benchmark random-walk specification. We contribute to the recent literature in many ...

Monetary authorities have often voiced their concerns about a high debt level that could potentially restrain their ability to control the short-term interest rate as an instrument of monetary policy. However, monetary policy rules in the literature do not account for such constraints. This paper derives an augmented interest rate rule in which the response of the interest rate to expected infl...

I would like to add my voice to the chorus in thanking President Fisher and the Dallas Fed for hosting this conference honoring John Taylor. It is a particular pleasure to have been invited to join this distinguished panel and to have this opportunity to discuss some of John Taylor's many important contributions to economics and monetary policy. In looking back at his work, I am struck by how t...