Many empirical studies find robust evidence that marginal cost of production directly depends on the nominal rate of interest. This relationship induces a cost channel for monetary policy transmission. Although the empirical literature provides ample evidence for a cost channel, studies that evaluate the welfare gains from monetary policy commitment have so far entirely ignored its presence. Th...

This paper reviews the state of the debate over rules versus discretion in monetary policy, focusing on the role of economic research in this debate. It shows that proposals for policy rules are largely based on empirical research using economic models. The models demonstrate the advantages of a systematic approach to monetary policy, though proposed rules have changed and generally improved ov...

In May 2000, the Treasurer/Minister of Finance invited me to review the operation of monetary policy in New Zealand and provided me with the Terms of Reference. In undertaking the review, I have read the wide range of submissions provided to me and have met with a number of submitters and other interested parties. I visited New Zealand for two weeks in November 2000 in order to observe the oper...

A resurgence of interest in the role of banks in the transmission of monetary policy has resulted in a spate of theoretical and empirical studies. These studies have established that, under certain conditions, the traditional transmission mechanism for monetary policy ("the money view") may be augmented through changes in the supply of bank loans ("the lending view"). Because both the money vie...

During the past two decades, maintenance of low inflation, “price stability,” has become the principal focus of central banks around the world. At the same time, the view has emerged that monetary policy is better suited than fiscal policy for short-run stabilization purposes. This paper examines to what extent monetary policy can be directed at both “monetary stabilization,” stabilizing inflat...

The past three decades have seen an extraordinary transformation in the conduct of monetary policy. In the 1970s, inflation had risen to very high levels, with most countries, including the United States, experiencing inflation rates in the double digits. Today, almost all nations in the world are in a low inflation environment. Of 223 countries, 193 currently have annual inflation rates less t...

In this paper we study the monetary and fiscal policy making in a monetary union when authorities face asymmetries in the countries constructing this monetary union. We analyze this problem in an asymmetric environment using a two-country theoretical model and by introducing two alternative types of national asymmetries : asymmetric shocks and the asymmetric transmission mechanism. The central ...

I am pleased to address this conference commemorating the twenty-fifth anniversary of the historic monetary policy changes implemented in October 1979. In my prepared remarks, I would like to focus on two issues with respect to safeguarding good monetary policy practice. First, I will discuss what constitutes good monetary policy practice and review the Federal Reserve’s record in satisfying it...