We show that short and long nominal interest rates are independent monetary policy instruments. The pegging of both helps solving the problem of multiplicity that arises when only short rates are used as the instrument of policy. A peg of the nominal returns on assets of different maturities is...

Flexible inflation targeting cannot be rationalised using conventional welfare economic criteria, except in a single, practically uninteresting special case. New-Keynesian DSGE models imply that optimal monetary policy implements the Bailey-Friedman Optimal Quantity of Money rule and that actual...

Recently, the Bank of Japan outlined a “two perspectives” approach to the conduct of monetary policy that focuses on risks to price stability over different time horizons. Interpreting this as pertaining to different frequency bands, we use band spectrum regression to study the determination...

We examine whether credit contributes to business cycle fluctuations by directly affecting consumption rather than through the now well-understood investment channel. Examining UK data we argue that consumers face a rising interest rate schedule whereby additional borrowing leads to higher...

The paper considers three methods for eliminating the zero lower bound on nominal interest rates and thus for restoring symmetry to domain over which the central bank can vary its policy rate. They are: (1) abolishing currency (which would also be a useful crime-fighting measure); (2) paying...

After a brief review of the main differences between New and Old Keynesian economics from the 1960s this paper focuses on a tension between traditional sluggish measures of potential output commonly used by policy-makers and the New Keynesian (NK) notion of this variable which conceptualizes it...

The paper discusses some fundamental problems in monetary economics associated with the determination and role of the numéraire. The issues are introduced by formalising a proposal, attributed to Eisler, to remove the zero lower bound on nominal interest rates by unbundling the numéraire and...

We study liquidity trap dynamics driven by nonfundamental shifts in expectations in a model with nominal rigidities, housing, credit frictions and a Taylor rule. Highly leveraged borrowing through nominal debt backed by real estate collateral greatly magnifies the decline in output and house...

"Macroeconomics without the LM curve" has begun to move advanced undergraduate closed economy macroeconomics teaching models away from the IS/LM approach to simple versions of the New Keynesian models taught in graduate courses and used in central banks. But the equally traditional and...

This paper develops a micro-founded general equilibrium model of the financial system composed of ultimate borrowers, ultimate lenders and financial intermediaries. The model is used to investigate the impact of uncertainty about the likelihood of governmental bailouts on leverage, interest...