We explore the implications of asset price volatility for the management of monetary policy. We show that it is desirable for central banks to focus on underlying inflationary pressures. Asset prices become relevant only to the extent they may signal potential inflationary or deflationary...

Previous models of rules versus discretion are extended to include uncertainty about the policymaker's "type." When people observe low inflation, they raise the possibility that the policymaker is committed to low inflation (type 1). This enhancement of reputation gives the uncommitted...

Under a discretionary regime the monetary authority makes no commitments about future money and prices. Then, if surprise inflation conveys economic benefits and if people form expectations rationally, it turns out that the equilibrium involves high and variable monetary growth and inflation....

In a discretionary regime the monetary authority can print more money and create more inflation than people expect. But, although these inflation surprises can have some benefits, they cannot arise systematically in equilibrium when people understand the policymaker's incentives and form their...

Inflationary finance involves first, the tax on cash balances from expected inflation, and second, a capital levy from unexpected inflation. From the standpoint of minimizing distortions, these capital levies are attractive, ex post, to the policymaker. In a full equilibrium two conditions hold:...

Natural-rate models suggest that the systematic parts of monetary policy will not have important consequences for the business cycle. Nevertheless, we often observe high and variable rates of monetary growth, and a tendency for monetary authorities to pursue countercyclical policies. This...

An important "empirical regularity" is the strong positive effect of money shocks on output and employment. One strand of business cycle theory relates this finding to temporary confusions between absolute and relative price changes. These models predict positive output effects of unperceived...

This paper develops a dynamic general equilibrium model that is intended to help clarify the role of credit market frictions in business fluctuations, from both a qualitative and a quantitative standpoint. The model is a synthesis of the leading approaches in the literature. In particular, the...

Proposals for 'inflation targeting' as a strategy for monetary policy leave open the important operational question of how to determine whether current policies are consistent with the long-run inflation target. An interesting possibility is that the central bank might target current...

In recent years a number of industrialized countries have adopted a strategy for monetary policy known as `inflation targeting.' We describe how this approach has been implemented in practice and argue that it is best understood as a broad framework for policy, which allows the central bank...