We consider optimal monetary stabilization policy in a New Keynesian model with explicit microfoundations, when the central bank recognizes that private-sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any beliefs close enough to model-consistency. We show how to characterize robustly optimal policy without...

We seek to determine the optimal amount of the insurer’s investment in all types of assets for a small and closed economy. The goal is to detect the implications and contributions the risk seeker and risk aversion insurer commonly make and the effectiveness in the investment decision. Also, finding the optimum portfolio for each is the main goal of the present study. To this end, we adopted the...

The annual average rate of inflation in the GDP deflator for 1980 was 10.1 percent. By 1984, the same measure had dropped to 4.4 percent, and from 1990 through the end of 1993, the rate of inflation has averaged 3.2 percent, deviating only moderately from that average over the period. From 1981 to 1984, the civilian unemployment rate averaged 8.6 percent, peaking at 10.7 percent in the fourth q...

Our major conclusions are as follows: (1) If inflation rates remain high, then the yield curve will tend to slope upward more steeply than in the past (or slope downward less steeply when the yield curve is inverted). (2) This yield curve situation will lead firms to shorten the average maturities of their liabilities, even though this will expose them to greater risks of earnings fluctuations ...

This paper analyzes the impact of indexed wage contracts on inflation and social welfare in a Barro–Gordon model with state contingent monetary policy. Wage indexation reduces the inflation bias but may raise the variance of inflation rates. In social optimum wages are fully indexed to the price level, but this requires optimal wage adjustments to productivity shocks. If wage adjustments to pro...

In closed or open economy models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. We analyze this result in the context of developing economies, where a large proportion of households are credit constrained and the share of food expenditures in total consumption expenditures is high. We develop an open eco...

A general equilibrium model of a small open economy is developed to analyze the optimal rate of inflation under discretion. Once agents’ welfare is the sole policy objective it is possible to show that openness and inflation no longer have a simple inverse relationship. A greater degree of openness may lead the policy maker to want to exploit the short-run Phillips curve more aggressively, even...

We compare optimal and simple interest-rate rules. Our model features optimizing agents, monopolistic competition in both product and labor markets, and one-period nominal contracts (for wages alone or for both wages and prices) signed before shocks are known. Exact solutions ensure that we obtain correct welfare rankings. Optimal rules maximize the unconditional expected utility of the represe...

Inflation-linked bonds have gained notoriety in recent years. The global volume has increased tenfold in the past decade, with the United States, the United Kingdom, and France among the largest issuers of these securities. Inflation-linked bonds (commonly known as linkers) are a unique asset class in that it is one of the few that offers a nearly perfect (direct) hedge against inflation, while...