A target for the short-term nominal interest rate does not pin down realized inflation. Neither does it pin down the term premia. Short and long rates are threrefore independent monetary policy instruments. A target of the term structure is equivalent to a peg of the returns on state-contingent...

Under a monetary policy rule for the nominal interest rate, i.e. the return on risk-free short-term nominal bonds, there may be a unique local equilibrium, but there are in general multiple global equilibria. We show that the appropriate interest rate instruments under uncertainty are...

How should monetary policy respond to changes in financial conditions? In this paper we consider a simple model where firms need internal and external funds to produce and they fail if they are not able to repay their debts. Both internal funds and firm debt are nominal assets and are...

I consider a reasonable deviation from the standard assumptions in the optimal taxation literature on public consumption and show that the results on the optimal taxes are substantially altered. In particular, `distortionary' taxes may be optimal after all. This reveals that, in contrast to the...

Nominal interest rates typically approach the zero-lower bound during a financial crisis. This is a constraint on optimal monetary policy: In a model with financial frictions, policy would set negative nominal interest rates in response to increases in credit spreads. We find that fiscal policy...

This paper assesses the relevance of the exchange rate regime for stabilization policy. Using both fiscal and monetary policy, we conclude that the exchange rate regime is irrelevant. This is the case independently of the severity of price rigidities, independently of asymmetries across...

We revisit the issue of multiplicity of equilibria when monetary policy is conducted with either the interest rate or the money supply as the sole instrument of policy. We show that in standard monetary models there are interest rate feedback rules, and also money supply rules, that implement a...

What instruments of monetary policy must be used in order to implement a unique equilibrium? This paper revisits the issues addressed by Poole (1970) and Sargent and Wallace (1975) on the multiplicity of equilibria when policy is conducted with either interest rate or money supply rules. We show...

the problem of general vs. firm-specific human capital investments.