Most central banks currently implement monetary policy by targeting a short-term interest rate. This paper asks: "What is the optimal form for such interest rate targeting, given the objectives facing central banks?" We find the optimal rule is for the central bank to change the target rate...

This paper derives the optimal size and timing of interest rate target changes. Despite the simplicity of the optimal rule, we are able to replicate a number of puzzling features of interest rate targeting observe in practice, as well as explain some dynamic properties of market interest rates....

This paper presents a model in which investors, acting in self-interest, force interest rates to the levels desired by the monetary authority. If interest rates move out of line with those required by the monetary authority, a statement (an open mouth operation) is all that is needed to restore...

This paper derives the optimal size and timing of interest rate target changes. Despite the simplicity of the optimal rule, we are able to replicate a number of puzzling features of interest rate targeting observe in practice, as well as explain some dynamic properties of market interest rates....