In the Keynesian model we thought of monetary policy as exogenous in the sense that the money supply, Mt, was set exogenously. This is useful for understanding the model but doesn’t really describe how monetary policy works in practice. In the real world, central banks adjust the money supply (and hence interest rates) endogenously in response to changing conditions. In this set of notes we dis...

The paper discusses how current in ‡ation targeting should be modeled, and argues that it is better represented as a commitment to a targeting rule (a rule specifying operational objectives for monetary policy or a condition for the target variables), than as a commitment to a simple instrument rule (like a Taylor rule).

The paper discusses how current in ‡ation targeting should be modeled, and argues that it is better represented as a commitment to a targeting rule (a rule specifying operational objectives for monetary policy or a condition for the target variables), than as a commitment to a simple instrument rule (like a Taylor rule).

This article uses a DSGE framework to evaluate the role of monetary policy in determining the likelihood of encountering the zero lower bound. We find that the probability of experiencing episodes of being at zero lower bound depends almost exclusively on the monetary policy rule. A policy rule, such as the one proposed by Taylor (1993) which is based on the dual mandate is highly likely to lea...