In this paper we study the inefficiencies of the monetary equilibrium and optimal monetary policies in a search economy. We show that the same frictions that give fiat money a positive value generate an inefficient quantity of goods in each trade and an inefficient number of trades (or search decisions). The Friedman rule eliminates the first inefficiency and the Hosios rule the second. A monet...

In this paper, I consider the lessons recent academic research and historical experiences with monetary targeting and inflation targeting offer for the design of monetary policy regimes. The practical experiences with both monetary and inflation targeting suggest that successful policies have incorporated a great deal of flexibility. In principle, both monetary targeting and inflation targeting...

Resolution of the debate over rules versus authority in the conduct of monetary policy appears to hinge on the solution to two separate but related problems. First, there is the problem of determining the most appropriate model to apply to describe the relationship between monetary instruments and economic aggregates. Second, there is the problem of determining the appropriate decision rules to...

This paper studies the effects of monetary policy rules in a monetary union. The focus of the analysis is on the interaction between the fiscal policy of member countries (regions) and the central monetary authority. When capital markets are integrated, the fiscal policy of one country will influence equilibrium wages and interest rates. Thus there are fiscal spillovers within a federation. The...

I study 46 vintages of FRB/US, the principal macro model used by Federal Reserve, as measures of real-time model uncertainty and examine the robustness of commonly applied, simple monetary policy rules. Model uncertainty turns out to be a substantial problem: key model properties di¤er in important ways across model vintages as do the optimized parameterizations of candidate rules. Among the ru...

The concept of rules for monetary policy has been more and more critized in recent years. The Deutsche Bundesbank is also urged to give up monetary targeting. The idea is that the economic performance could be improved if monetary policy became more pragmatic and was more concerned about slow growth and high unemployment. In reality, however, monetary policy in the past decades has been highly ...

Since John Taylor’s (1993) seminal paper, a large literature has argued that active interest rate feedback rules, that is, rules that respond to increases in inflation with a more than one-for-one increase in the nominal interest rate, are stabilizing. In this paper, we argue that once the zero bound on nominal interest rates is taken into account, active interest-rate feedback rules can easily...