This paper studies the determinacy properties of monetary and fiscal policy rules in a small-scale New Keynesian model. We modify the standard model in two ways. First, we allow positive public debt in the steady state as in Leeper [Journal of Monetary Economics 27, 129–147 (1991)]. Second, we add rule-of-thumb consumers as in Bilbiie [Journal of Economic Theory 140, 162–196 (2008)]. Leeper stu...

In a managed floating exchange rate regime, one of the most important issues is the degree to which the monetary authorities intervene in the foreign exchange market.  The appropriate level of intervention in the foreign exchange market can be discussed in a framework which emphasizes the trade-off between changes in the country’s level of international reserves and minimizes the country’s real...

This paper examines how alternative views of the monetary transmission mechanism affect the choice of a monetary policy rule. The main finding is that many different structural models indicate that the same simple monetary policy rule—one in which the central bank’s target short-term interest rate reacts to inflation and to real output—would perform well. Such rules work well even in models whe...

In this paper we study the ine!ciencies of the monetary equilibrium and optimal monetary policies in a search economy. We show that the same frictions that give !at money a positive value generate an ine!cient quantity of goods in each trade and an ine!cient number of trades (or search decisions). The Friedman rule eliminates the !rst ine!ciency and the Hosios rule the second. A monetary equili...

Following recent episodes of financial distress, the interaction between monetary policy and asset price fluctuations has gained renewed attention. Here, we assess the role of asset price misalignments in monetary policy in an adaptive learning context. Our model first extends Bullard and Mitra (2002), including an additional role for asset prices. From the point of view of the E-Stability crit...

The potential of monetary policy to stabilize fluctuations in output and employment is demonstrated in a stochastic rational expectations model in which firms choose, considering average profitability, to set prices in advance of the period when they apply to goods sold. This lead time in pricing decisions increases the fluctuations of output about the normal employment level. But proper use of...