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...

When the nominal interest rate reaches the zero lower bound (ZLB), a conventional monetary policy, namely, the adjustment of short-term interest rate, may become impractical and ineffective for central banks. Therefore, quantitative easing (QE) is one of the few available policy options of...