This paper analyzes the relationship between money and inflation in a small open economy, where domestic and foreign currencies are perfect substitutes as means of payment. It is shown that, if the path of domestic money supply is such that individuals find it optimal to change the currency in which transactions are settled, there will be an adjustment period during which domestic inflation adj...

The optimal weights on indicators in models with partial information about the state of the economy and forward-looking variables are derived and interpreted, both for equilibria under discretion and under commitment. An example of optimal monetary policy with a partially observable potential output and a forward-looking indicator is examined. The optimal response to the optimal estimate of pot...

We use a state-dependent model where pricing rules are optimal to examine the costs of a money-based disinflation under various assumptions about the credibility of the policy change. Our analysis allows us to relate actual credibility and future inflation inertia to the asymmetry of the price deviation distribution. An important implication of our statedependent setting is that disinflation ca...

We consider inflation and debt dynamics under a global interest rate rule when private agents forecast using adaptive learning. Given the zero lower bound on interest rates, active interest rate rules are known to imply the existence of a second, low-inflation steady state. Under learning the economy can slip below this low-inflation steady state and be driven to an even lower inflation floor s...

This paper presents a toolkit for generating optimal policy projections. It makes five contributions. First, the requires minimal set of inputs: only baseline projection target and instrument variables impulse responses those to shocks. Second, it solves projections under commitment, limited-time discretion. Third, handles multiple instruments. Fourth, constraints on instruments such as lower b...

The paper examines the interrelationship between fiscal and monetary policy in a two-country monetary union. The worst scenario occurs when an independent central bank (CB) sets the nominal interest rate and responds to rising government debt/GDP ratios by monetisation. The result is high inflation, high debt/GDP ratios and a large public sector. Government debt and inflation are contained if t...

We examine global economic dynamics under learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. Under normal monetary and fiscal policy, the intended steady state is locally but not globally stable. Large pessimistic shocks to expectations can lead to deflationary spirals with falling prices and falling output. To avoid this outcome we recommend a...

The optimal weights on indicators in models with partial information about the state of the economy and forward-looking variables are derived and interpreted, both for equilibria under discretion and under commitment. An example of optimal monetary policy with a partially observable potential output and a forward-looking indicator is examined. The optimal response to the optimal estimate of pot...

This paper compares several methods for estimating the effects of monetary innovations on key macroeconomic variables and, subsequently, clarifies issues related to the use of instrumental variables in the identification of structural impulse responses. In particular, we make explicit the property that a measure of monetary policy must satisfy in order to identify the effects of monetary shocks...

This paper argues that inflation-targeting central banks should announce explicit loss function with numerical relative weights on output-gap stabilization and use and announce optimal time-varying instrument-rate paths and corresponding inflation and output-gap forecasts. Simple voting procedures for forming the Monetary Policy Committee’s aggregate loss function and time-varying instrument-ra...