Optimal Monetary Rules Research Articles

Monetary–fiscal policy interactions and commitment versus discretion in a monetary union

We consider monetary–fiscal policy interactions in a monetary union. If monetary and fiscal authorities have different ideal output and inflation targets, the Nash equilibrium output or inflation or both are beyond the ideal points of all authorities. Leadership of either authority is better. Fiscal discretion entirely negates the advantage of monetary commitment: The optimal monetary rule is equivalent to discretionary leadership of monetary over fiscal policy. Agreement about ideal output and inflation creates a monetary–fiscal symbiosis, yielding the ideal point despite disagreement about the relative weights of the two objectives, for any order of moves, without fiscal co-ordination, and without monetary commitment.

Staggering, the optimal monetary rule and persistence

The purpose of this paper is to show that persistence is not an attribute that derives from the characteristics of wage and price setting alone; the structure of demand, the monetary rule and the welfare loss function are also crucial determinants of the time-series characteristics of the model.

Optimal monetary policy in an open economy

This paper analyzes the optimal intertemporal tradeoff between inflation and output in an open economy under perfect foresight. The announcement of the optimal plan may, or may not, generate an initial jump in the exchange rate. That depends upon the real adjustment costs, which such unanticipated changes impose on the economy. In the case that such jumps occur, the question of time consistency of the optimal policy arises. A time-consistent solution is obtained provided (i) the policy maker is not too myopic, (ii) the adjustment costs associated with the jump in the exchange rate are of an appropriate form. The optimal monetary rule is derived and properties of this rule, as well as the overall optimal adjustment of the economy, are discussed.

Price Variability, Supply-Side Policies and Monetary Rules

Wage-subsidy policies or demand management are equally effective in stabilizing output about its frictionless level in Fischer-Gray predetermined labor-contracts models. However, if the authorities are also concerned with price variability, the optimal monetary rule is unambiguously superior. Copyright 1987 by The Review of Economic Studies Limited.