Simple models of monetary policy often imply optimal policy behavior that is considerably more aggressive than what is commonly observed. This paper argues that such counterfactual implications are due to model restrictions and a failure to account for multiplicative parameter uncertainty,...

We use a standard quantitative business cycle model with nominal price and wage rigidities to estimate two measures of economic ineffciency in recent U.S. data: the output gap - the gap between the actual and effcient levels of output - and the labor wedge - the wedge between households'...