Modifying the objective function of a discretionary central bank to include an interest-rate smoothing objective increases the welfare of an economy where large contractionary shocks occasionally force the central bank to lower the policy rate to its effective lower bound. The central bank with...

We study optimal monetary and fiscal policy in a New Keynesian model where occasional declines in agents' confidence can give rise to persistent liquidity trap episodes. Unlike in the case of fundamental-driven liquidity traps, there is no straightforward recipe for mitigating the welfare costs...

In an economy with an occasionally binding zero lower bound (ZLB) constraint, the anticipation of future ZLB episodes creates a trade-off for discretionary central banks between inflation and output stabilization. As a consequence, inflation systematically falls below target even when the policy...

How does the need to preserve government debt sustainability affect the optimal monetary and fiscal policy response to a liquidity trap? To provide an answer, we employ a small stochastic New Keynesian model with a zero bound on nominal interest rates and characterize optimal time-consistent...

The zero lower bound (ZLB) constraint on interest rates makes speed limit policies (SLPs)—policies aimed at stabilizing output growth—less effective. Away from the ZLB, the history dependence induced by a concern for output growth stabilization improves the inflation-output tradeoff for a...

Research with Keynesian-style models has emphasized the importance of the output gap for policies aimed at controlling inflation while declaring monetary aggregates largely irrelevant. Critics, however, have argued that these models need to be modified to account for observed money growth and...

Research with Keynesian-style models has emphasized the importance of the output gap for policies aimed at controlling inflation while declaring monetary aggregates largely irrelevant. Critics, however, have argued that these models need to be modified to account for observed money growth and...

In the New-Keynesian model, optimal interest rate policy under uncertainty is formulated without reference to monetary aggregates as long as certain standard assumptions on the distributions of unobservables are satisfied. The model has been criticized for failing to explain common trends in...

This paper investigates whether the quantity theory of money is still alive. We demonstrate three insights. First, for countries with low inflation, the raw relationship between average inflation and the growth rate of money is tenuous at best. Second, the fit markedly improves, when correcting...

The paper analyses the short-run impact of periods of strong monetary growth on inflation dynamics for 15 industrialised economies. We find that, over a 3-year horizon, the positive link between monetary aggregates and prices holds in approximately fifty percent of the cases. An econometric...