This paper reviews the recent literature on monetary policy rules. To organize the discussion, we exposit the monetary policy design problem within a simple baseline theoretical framework. We then consider the implications of adding various real word complications. We concentrate on developing results that are robust across a reasonable variety of competing macroeconomic frameworks. Among other things, we show that the optimal policy implicitly incorporates inflation targeting. We also characterize the gains from making credible commitments to fight inflation and consider the implications of frictions such as imperfect information and model uncertainty. Finally, we assess how proposed simple rules, such as the Taylor rule, square with the principles for optimal policy that we describe. We use this same metric to evaluate the recent course of U.S. monetary policy.

/pdf/the-science-of-monetary-policy-a-new-keynesian-perspective-2513aj8m00.pdf

The Science of Monetary Policy: A New Keynesian Perspective

The paper reviews the recent literature on monetary policy rules. We exposit the monetary policy design problem within a simple baseline theoretical framework. We then consider the implications of adding various real world complications. Among other things, we show that the optimal policy implicitly incorporates inflation targeting. We also characterize the gains from making a credible commitment to fight inflation. In contrast to conventional wisdom, we show that gains from commitment may emerge even if the central bank is not trying to inadvisedly push output above its natural level. We also consider the implications of frictions such as imperfect information.

/pdf/the-science-of-monetary-policy-a-new-keynesian-perspective-1hk1n82x2a.pdf

Interest and Prices

Part 1 Empirical evidence on money and output: introduction some basic correlations estimating the effect of money on output summary. Part 2 Money in a general equilibrium framework: introduction the Tobin effect money in the utility function summary appendix - the MIU approximation problems. Part 3 Money and transactions: introduction shopping-time models cash-in-advance models other approaches summary appendix - the CIA approximation problems. Part 4 Money and public finance: introduction bugdet accounting equilibrium seigniorage optimal taxation and seigniorage Friedman's rule revisited nonindexed tax systems problems. Part 5 Money and output in the short run: introduction flexible prices sticky prices and wages a framework for monetary analysis inflation persistence summary appendix problems. Part 6 Money and the open economy: introduction the Obstfeld-Rogoff two-country model policy coordination the small open economy summary appendix problems. Part 7 The credit channel of monetary policy: introduction imperfect information in credit markets macroeconomic implications does credit matter? summary. Part 8 Discretionary policy and time inconsistency: introduction inflation under discretionary policy solutions to the inflation bias is the inflation bias important? do central banking institutions matter? lessons and conclusions problems. Part 9 Monetary-policy operating procedures: introduction from instruments to goals the instrument-choice problem operating procedures and policy measures problems. Part 10 Interest rates and monetary policy: introduction interest-rate rule and the price level interest rate policies in general equilibrium models the term structure of interest rates a model for policy analysis summary problems.

Monetary Theory and Policy

Recursive methods offer a powerful approach in dynamic macroeconomics. This book contains both an introduction to recursive tools, including standard applications such as asset pricing, and advanced material, including analyses of reputational mechanisms and contract design. The tools are presented with enough technical sophistication to get the reader started working on practical problems. When numerical simulations are called for, the book provides suggestions for how to proceed, as well as references for further reading. The applications cover many substantive issues in macroeconomics, such as equilibrium asset prices, market incompleteness, wealth distribution, fiscal-monetary theories of inflation, government debt, optimal labour and capital taxation, time consistency and credible government policies, optimal social insurance, economic growth and labour market dynamics.

Recursive Macroeconomic Theory

Reserve requirements imposed against bank deposits, nominal interest payments on bank reserves (or on base money), and inflation can all be viewed as generating tax effects. Any analysis of optimal monetary policy in a steady-state equilibrium needs to consider the simultaneous choice of all the tax instruments controlled by the monetary authority. Such an analysis is carried out in this paper. It is shown that when the tax system is not indexed, the optimal nominal interest rate on the monetary authority's liabilities is likely to be zero. More importantly, any discussion of the payment of interest on reserves and currency must take into account the nature of the tax system and the rate of inflation in a nonindexed economy.

/pdf/optimal-taxation-by-the-monetary-authority-3j79713ayn.pdf

Optimal Taxation by the Monetary Authority

Monetary targeting and inflation: 1976-1984

Since the onset of the 2008 financial crisis, many economists have studied the effects of unconventional monetary policies such as credit-easing policies or actions aimed at altering the maturity structure of the private sector’s asset holdings. But surprisingly, there has been relatively little work on one of the traditional policy tools of a central bank—required reserve ratios—and how required reserves might be used as a cyclical policy instrument. Christian Glocker and Peter Towbin fill this gap by employing a modern dynamic stochastic general equilibrium (DSGE) model of a small open economy to analyze the use of reserve requirements as a tool for cyclical stabilization. At one time, we all learned that central banks had three policy instruments—the quantity of non-borrowed reserves, the interest rate charged on discount window borrowing, and the required reserve ratio. The first two instruments operated by affecting the supply of bank reserves; the third worked by affecting the demand for reserves. Then, many central banks adopted a short-term interbank rate as their primary policy instrument. Doing so made the quantity of non-borrowed reserves an endogenous variable, adjusting to ensure reserve supply and demand were consistent with the policy interest rate. Under such a policy regime, the discount rate and reserve requirement became irrelevant. Of course, this wasn’t (and isn’t) true of developing economies. There, central banks continued to

/pdf/discussion-of-reserve-requirements-for-price-and-financial-2uuxm9szvk.pdf

Discussion of "Reserve Requirements for Price and Financial Stability: When Are They Effective?" ∗

Central bank independence and the costs of disinflation in the EC

/pdf/output-inflation-tradeoffs-and-central-bank-independence-2j9583n4e9.pdf

Carl E. Walsh

Papers

Optimal Taxation by the Monetary Authority

Monetary targeting and inflation: 1976-1984

Discussion of "Reserve Requirements for Price and Financial Stability: When Are They Effective?" ∗

Central bank independence and the costs of disinflation in the EC

Output-Inflation Tradeoffs and Central Bank Independence