This paper analyses time-inconsistency problems related to the exchange rate channel of monetary policy. Within a simple open-economy macroeconomic model, where the exchange rate is the only forward-looking variable, we show that a difference emerges between optimal policy under discretion and...

We study how monetary policy should respond to shocks which permanently alter the steady state structure of the economy. In such a case monetary policy affects not only the short run misallocations due to nominal rigidities, but also relative prices which stimulate reallocation of capital. We...

When policy depends on popular support, it is unfeasible to obtain allocative efficiency under competitive markets and free entry. We derive that this fundamental impossibility result holds because policy as well as prices respond to factor allocations. In our baseline model, free entry regards...