Assigning a discretionary central bank a mandate to stabilize an average in ation rate| rather than a period-by-period in ation rate|increases welfare in a New Keynesian model with an occasionally binding lower bound on nominal interest rates. Under rational expecta- tions, the...

How is the price level determined in a monetary union when the common monetary policy pegs the nominal interest rate? How are the price levels in the member countries determined? We extend the fiscal theory of the price level to the case of a heterogenous monetary union. Price level determinacy...

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...