This paper employs stochastic simulations of a small structural rational expectations model to investigate the consequences of the zero bound on nominal interest rates. We find that if the economy is subject to stochastic shocks similar in magnitude to those experienced in the U.S. over the...

This paper studies monetary policy rules in a small open economy with Inflation Targeting, incomplete pass-through and rigid nominal wages. The paper shows that, when nominal wages are fully flexible and pass-through is low to moderate, the monetary authority should target the consumer price...

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...

This paper presents a welfare analysis of a desirable Inflation Targeting Policy in order to achieve price stabilization and an efficient level of output under a deflationary economy. Concretely, we present a general model that can treat the components of a Inflation Targeting Policy, such as...

We study optimal monetary policy design in a simple model that deviates from the linear-quadratic paradigm and provides a rationale for the practice of inflation zone targeting. We show that the presence of either zone-quadratic preferences or a zone-linear relationship between inflation and...

In this paper, I investigate the monetary policy of five industrialized countries which have had explicit inflation targets for more than 15 years. Considering the case of discretionary policy as well as commitment, I estimate two first order conditions. The results support the theory of...

Over the last quarter of a century, inflation targeting has become a popular monetary regime. Nevertheless, empirical evaluations of IT have shown contradictory results. Part of the reason is that IT in and of itself constitutes an endogenous decision and thus needs to be properly instrumented....

In this paper, we investigate the effects of an anticipated future change in monetary policy regime in small open economies targeting either inflation or the exchange rate. The announcement of a future change in the monetary policy regime triggers an immediate change in the behavior of...

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

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