This paper addresses two main questions. First, it examines the implications of financial frictions, embedded in a New Keynesian DSGE model with a banking sector, for the conduct of welfare-optimal monetary policy. Assuming only one monetary instrument, we analyse how financial frictions affect the gains from commitment and how different are the optimized simple rules with and without financial...

Standard monetary policy analysis built upon the New Keynesian model suggests that an optimal monetary policy rule is one which minimizes a weighted sum of the variance of inflation and the variance of the output gap. As one might expect, the Taylor rule evaluates well under this criteria. Recent calls for nominal GDP targeting therefore must contend with Taylor rule as an alternative approach ...

We revisit the issue of multiplicity of equilibria when monetary policy is conducted with either the interest rate or the money supply as the sole instrument of policy. We show that in standard monetary models there are interest rate feedback rules, and also money supply rules, that implement a unique global equilibrium. This is a contribution to a literature that either concentrates on conditi...

In the framework of a Keynesian monetary macro model we study implications of a kinked Phillips-Curve and alternativemonetary policy rules. As alternative monetary policy rules we consider monetary growth targeting and interest rate targeting (the Taylor rule). Our monetary macro model exhibits: asset market clearing, disequilibrium in product and labor markets, sluggish price and quantity adju...

The design of interest rate rules for conducting monetary policy have recently been examined for two key concerns. The first issue is determinacy of equilibria. Indeterminacy (multiplicity of stationary rational expectations equilibria) is a concern in models of monopolistic competition and price stickiness are currently a popular framework for the study of monetary policy. The second issue is ...