This paper studies the implications of certain kinds of uncertainty for monetary policy. It first describes the optimum policy rule in a simple model of the transmission mechanism as in Ball and Svensson. It then examines how this rule ought to be modified when there is uncertainty about the parameters, about the time lags, or about the nature of shocks. The paper also discusses the case of a s...

Inflation targeting needs to be supplemented by an economic growth target so that central banks will not adopt monetary policy which results in stagnation. There is no guarantee that the economy will move towards full employment by itself when the inflation rate is kept between two to three per cent. Monetary policy does not have a comparative advantage in achieving price stability. Svensson's ...

economy is operating in the region of price stability, public expectations and beliefs about the central bank’s plans and objectives, always important, become even more so. First, because the public can no longer safely assume that the central bank prefers lower to higher inflation, expectations about future policy actions and future inflation may become highly sensitive to what the public perc...

This paper characterizes optimal monetary policy for a range of alternative economic models, applying the general theory developed in Giannoni and Woodford (2002a). The rules computed here have the advantage of being optimal regardless of the assumed character of exogenous additive disturbances, though other aspects of model specification do affect the form of the optimal rule. In each case, op...

We study optimal monetary policy design in a simple model that deviates from the linear-quadratic paradigm and provides a rationale for the practice of inflation zone targeting. We show that the presence of either zone-quadratic preferences or a zonelinear relationship between inflation and economic activity provides strong incentives to deviate from conventional linear policies. We calibrate t...

The justification for inflation targeting rests on three core propositions. The first is called ‘lean against the wind’, which refers to fact that the monetary authority contracts (expands) aggregate demand below capacity when the actual rate of inflation is above (below) target. The second is ‘the divine coincidence’, which means that stabilizing the rate of inflation around its target is tant...

Flexible inflation targeting has been advocated as a practical approach to the implementation of an optimal state-contingent monetary policy, but theoretical expositions reaching this conclusion have typically abstracted from the fiscal consequences of monetary policy. Here we extend the standard theory by considering the character of optimal monetary policy under a variety of assumptions about...