We investigate the optimality of monetary policy targeting rules in a macroeconomic model based on explicit micro-foundations for intrinsic persistence in inflation and real output. For the corresponding social welfare loss function to be minimized by the central bank, inertia arises...

Working with micro-founded loss functions to derive and analyse optimal policy ensures consistency with the model used and overcomes the misleading prescriptions that result from using exogenous ad hoc loss functions. However, when allowance is made for the fact that different theories of...