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

Todo banco central debe tomar sus decisiones de politica en medio de un escenario incierto, basandose en su conocimiento imperfecto y cambiante sobre la economia. Aunque la investigacion sobre politica monetaria con incertidumbre y aprendizaje ha encontrado pocos resultados generales, una leccion contundente es que no se puede pasar por alto ni una ni otro. Este articulo hace una revision selectiva de la literatura existente sobre la incertidumbre y el aprendizaje, con enfasis en lo que atane a la conduccion de la politica monetaria. Luego analiza la investigacion de frontera presentada en la ultima conferencia anual del Banco Central de Chile, que reune nuevos resultados teoricos y evidencia empirica valida tanto para paises desarrollados como para la economia chilena.

https://dialnet.unirioja.es/descarga/articulo/2870813.pdf

Monetary Policy Under Uncertainty and Learning: An Overview

Asset prices, asset stocks and rational expectations

This paper attempts to assess empirically the impact on output and inflation of monetary policy in the U-S. during the period of M1 targeting from 1976 to 1984. The impact of policy shocks on output and inflation, and the impact of aggregate demand, aggregate supply and money demand shocks on M1 and the Fed's target path, are examined through the use of impulse response functions. These response functions are based on an orthogonalization of VAR residuals derived from an estimated structural model. The VAR specification reflects the finding that M1 and the Fed's target for M1 are cointegrated. The evidence suggests that money supply shocks and shocks to M1 target have accounted for little of the observed volatility of output or inflation. However, the induced policy response to aggregate demand and supply shocks has contributed to subsequent inflation.

/pdf/the-impact-of-monetary-targeting-in-the-united-states-1976-3qbbiijbkv.pdf

The impact of monetary targeting in the united states: 1976-1984

Models in which fiscal and monetary authorities cooperate to minimize the distortionary costs of raising revenue to finance an exogenous stream of government expenditures are shown to have implications for the long-run relationships between government expenditures, tax revenues and seigniorage. First, tax and seigniorage revenue should be cointegrated. Second, the cointegrating vector linking taxes and seigniorage should be only one of the cointegrating vectors linking expenditures, tax revenues and seigniorage. Third, the deficit net-of-interest should be nonstationary. These implications are tested using annual U.S. data from the period 1914 to 1986. The data reject all three implications of the theory.

Seigniorage and tax smoothing in the United States: 1914-1986

Recent crises in emerging markets have generated a fundamental re-appraisal of theoretical models of international capital flows It is now generally recognised that crises have occurred in circumstances that cannot be explained by first generation models of speculative attacks that seemed quite acceptable only a few years ago First generation models (Krugman 1979; Flood and Garber 1980) and their descendants dominated thinking about capital flows and crises partly because they explained several important features of balance of payments crises based on very simple behavioural assumptions about governments and private investors

/pdf/academic-views-of-capital-flows-an-expanding-universe-54gsjvt0le.pdf

Carl E. Walsh

Papers

Monetary Policy Under Uncertainty and Learning: An Overview

Asset prices, asset stocks and rational expectations

The impact of monetary targeting in the united states: 1976-1984

Seigniorage and tax smoothing in the United States: 1914-1986

Academic Views of Capital Flows: An Expanding Universe