We determine optimal discretionary monetary policy in a New-Keynesian model when nominal interest rates are bounded below by zero. Nominal interest rates should be lowered faster in response to adverse shocks than in the case without bound. Such ‘preemptive easing’ is optimal because expectations of a possibly binding bound in the future amplify the e ects of adverse shocks. Calibrating the mod...

In May 1927, the German central bank intervened indirectly to reduce lending to equity investors. The crash that followed ended the only stock market boom during Germany’s relative stabilization 1924-28. This paper examines the factors that lead to the intervention as well as its consequences. We argue that genuine concern about the ‘exuberant’ level of the stock market, in addition to worries ...

This paper presents a theory of inflation in an economy with commodity money and supports it by evidence from the inflationary episodes in France during the fourteenth and fifteenth centuries. The paper shows that commodity money can be inflated similarly to fiat money through repeated debasements, which act like devaluation. Furthermore, as with fiat money, demand for commodity money falls wit...

A growing empirical and theoretical literature argues in favor of specifying monetary policy in the form of Taylor-type interest rate feedback rules. That is, rules whereby the nominal interest rate is set as an increasing function of inflation with a slope greater than one around an intended inflation target. This paper shows that because of the zero bound on nominal interest rates, such rules...

Faced with real and nominal shocks, what should a benevolent central bank do, fix the money growth rate or target the inflation rate? In this paper, we make a first attempt at studying the optimal choice of monetary policy instruments in a micro-founded model of money. Specifically, we produce an overlapping generations economy in which limited communication and stochastic relocation creates an...

Phillips curves are central to discussions of inflation dynamics and monetary policy. New Keynesian Phillips curves describe how past inflation, expected future inflation, and a measure of real marginal cost or an output gap drive the current inflation rate. This paper studies the (potential) weak identification of these curves under generalized methods of moments (GMM) and traces this syndrome...

We use the inflation premium—the difference between nominal and real interest rates—as a proxy for expected inflation in the context of the New Keynesian Phillips Curve. Using data from inflation-indexed and nominal bonds we estimate a forward-looking Phillips curve for the United Kingdom over the period 1985-2004. The proposed model describes UK inflation dynamics considerably better than does...

Real interest and inflation rates have been very low in many industrialized countries since the Great Recession. In this paper, a mechanism of low and floating real interest and inflation rates is examined based on the concept a “Nash equilibrium of a Pareto inefficient path” and the law of motion for trend inflation. I show that, because the link between the marginal product of capital and the...

This paper examines the role of external shocks in explaining macroeconomic fluctuations in African countries. We construct a quantitative, stochastic, dynamic, multi-sector equilibrium model of a small open economy calibrated to represent a "typical" African economy. In our framework, external shocks consist of trade shocks, modeled as fluctuations in the prices of exported primary commodities...

This paper characterizes the properties of various interest-rate rules in a basic forwardlooking model. We compare simple Taylor rules and rules that respond to price-level fluctuations (called Wicksellian rules). We argue that by introducing an appropriate amount of history dependence in policy, Wicksellian rules perform better than optimal Taylor rules in terms of welfare, robustness to alter...