We construct a model that captures New Monetarist ideas in order to explain post-Great Recession observations on inflation, nominal interest rates, and real interest rates. When finance constraints bind, the model can deliver low real interest rates and positive rates of inflation at the zero lower bound. Optimal monetary policy in the face of a financial crisis shock implies a positive nominal...

We implement optimal economic outcomes at the lowest social cost by combining reputation and contracting mechanisms to overcome the time-inconsistency problem of monetary policy associated with an inflation bias. We characterize the conditions under which the reputation force alone induces a central bank to behave in a socially optimal way. When these conditions fail, an incentive contract is i...

Working papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views stated herein are those of the authors and are not necessarily those of the Federal Reserve Bank...

We implement optimal economic outcomes at the lowest social cost by combining reputation and contracting mechanisms to overcome the time-inconsistency problem of monetary policy associated with an inflation bias. We characterize the condition under which the reputation force alone induces a central bank to behave in a socially optimal way. When this condition fails, an incentive contract is inv...