In this paper we ask the empirical question are bond covenants priced? Consistent with the Costly Contracting Hypothesis (CCH) developed by Smith and Warner (1979), we find that they are. We document a negative relation between the promised yield on corporate debt issues and the presence of...

This paper characterizes, empirically, the conduct of monetary policy in a small open economy. In particular, using as a case study the Chilean inflation targeting experience, we assess the role of the exchange rate in the determination of the interest rate. We conclude that Chile has adopted...

In times of low-inflation, conventional monetary policy is perpetually exposed to the risk of being caught by the liquidity trap. As a part of a pre-emptive monetary policy to avoid the liquidity trap, many economists have pointed out that this risk can be possibly circumvented by targeting a...

This paper surveys the economic literature on simple policy rules and analyzes econometric methods used to estimate them, emphasizing effects of model misspecification. We draw attention to inconsistencies in evaluation of the rules and implications for policy advice, which is commonly done...

This paper evaluates the performance of simple monetary policy rules in a calibrated model for the Chilean economy. The monetary regimes considered are: exchange rate peg, money peg, inflation targeting, nontradable inflation targeting, and a Taylor rule. We develop a small open economy model...

Under a Bayesian framework of model uncertainty, closed economy models of monetary policy typically suggest that policy responses should be attenuated. Conversely, under a Knightian view of uncertainty, where the policymaker cannot specify probabilities across alternative models, intensifying...

Central banks behave purposefully when they set monetary policy, basing their decisions upon the data that is available and upon their understanding of the economy. At the same time, policy decisions affect economic outcomes, and the likelihood of observing a given state of the world. This paper...

This paper proposes a simple framework for analyzing a continuum of monetary policy rules characterized by differing degrees of credibility, in which commitment and discretion become special cases of what we call quasi commitment. The monetary policy authority is assumed to formulate optimal...

This paper evaluates monetary policy rules in a business cycle model with staggered prices and wage setting a la Calvo and asymmetric information in the credit market. Rules are compared in a utility based welfare metric, the effects of the model’s nonlinear dynamics are captured by a...

In recent times, economists concur that economy's response to monetary policy is somewhat weaker then they were in the past. However, the cause of such change remains an open issue. One plausible reason for this change could be attributed to the financial reform processes that have brought...