The monetary policy literature has recently devoted considerable attention to Taylor-type rules, in which the interest rate set by the central bank depends on measures of inflation and aggregate output. We show that if policy-makers attempt to choose the optimal rule within a Taylor-type...

Many models of monetary policy predict a trade-off between inflation and output variance despite compelling evidence that the Federal Reserve has become more aggressive in fighting inflation and there has been a resulting decline in both inflation and output variance. We address this apparent...