We find that contractionary monetary policy shocks generate statistically significant movements in inflation and expected real stock returns, and that these movements go in opposite directions. Since positive shocks to output precipitate monetary tightening, we argue that the countercyclical...

This paper analyzes the issues of discretion and commitment in monetary policy under an exchange rate-targeting regime. Neither a linear state-contingent inflation contract for the central bank nor an explicit state-contingent inflation target combined with a weight-conservative central bank can...