Central banks have usually employed short-term rates as the main instrument of monetary policy. In the last decades, however, forward guidance has also become a central tool for monetary policy. In an innovative way this paper combines two sources of extraneous information - high frequency...

The Ramsey approach to policy analysis finds the best competitive equilibrium given available instruments but is silent about how to get there uniquely. Many ways of specifying monetary policy lead to indeterminacy. Sophisticated policies do not. They depend on the history of past actions and...