We solve for the optimal time-consistent monetary policy in the New Keynesian model with repeated simultaneous play between the monetary authority, households, and firms. Recent work on optimal time-consistent monetary policy has emphasized the existence of multiple Markov perfect equilibria in...

As such, this represents a DSGE framework that can be used to analyze the effects of macroeconomic shocks, as well as systematic and unsystematic monetary policy on the yield curve.

In this paper, we show that strategic complementarities--such as firm-specific factors or quasi-kinked demand--have crucial implications for the design of monetary policy and for the welfare costs of output and inflation variability. Recent research has mainly used log-linear approximations to...