Abstract
This paper examines the optimal monetary policy rules in a business cycle model with nominal rigidities. Optimality is measured in terms of a utility-based welfare metric, and the welfare effects of the non-linear dynamics of the model are captured by a quadratic approximate solution method. The welfare maximizing rule among a class of Taylor-style rules is characterized by i) super-inertial adjustments in interest rates; ii) strong short run anti-inflation coupled with long run deflation, and iii) increasing interest rates in response to higher real output level and growth.
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