Understanding the features and the determinants of individual price setting behaviour is important for the formulation of monetary policy. These behavioural mechanisms play a fundamental role in influencing the characteristics of aggregate inflation and in determining how monetary policy affects...

This paper disentangles fluctuations in disaggregated prices due to macroeconomic and sectoral conditions using a factor-augmented vector autoregression estimated on a large data set. On the basis of this estimation, we establish eight facts: (1) Macroeconomic shocks explain only about 15% of...

The paper evaluates some proposals for macroeconomic stabilization in an open economy, which take the form of simple rules. The first rule assigns monetary policy to inflation control and does not require fiscal intervention. The second rule adds fiscal control of a foreign wealth target to the...

The Friedman rule states that steady-state welfare is maximized when there is deflation at the real rate of interest. Recent work by Khan et al. (2003) uses a richer model but still finds deflation optimal. In an otherwise standard new Keynesian model we show that, if households have hyperbolic...

There is a broad consensus in the literature that costs of information processing and acquisition may generate costly disagreements in expectations among economic agents, and that central banks may play a central role in reducing such dispersion in expectations. This paper analyses empirically...

Weak public institutions, including high levels of corruption, characterize many developing countries. With a simple model, we demonstrate that institutional quality has important implications for the design of monetary policies and can produce several departures from the conventional wisdom. We...

A small open economy model is presented, which allows explicit treatment of uncertainty and its effects on macroeconomic behaviour. Inflation targeting is compared to the welfare maximizing monetary rule and to a fixed nominal exchange rate. It is found that flexible inflation targeting produces...

This Paper explores the quantitative implications of an approach to monetary policy that gained prominence in the United States during the 1990s. Proponents of this approach recommend that, when inflation is moderate but still above the long-run objective, the central bank should not move...

Several recent studies imply that the response of national saving to fiscal policy is non-monotonic. In this paper, we use two data sets to search for the circumstances in which such non-monotonic responses arise: one refers to a sample of OECD countries, as in previous studies, and one to a...

This Paper considers monetary and exchange rate policy in Korea since the financial crisis of 1997-98. The Bank of Korea has adopted much of the apparatus of inflation targeting, with a band for target inflation and a Monetary Policy Report to the National Assembly. This regime has served the...