This paper computes the welfare consequences, for a representative agent, of a shift in the inflation target of monetary authorities. The welfare computations are conducted first by comparing the two steady states that the different inflation targets entail, and next by accounting for the...

Economic outcomes in dynamic economies with forward-looking agents depend crucially on whether or not the central bank can precommit, even in the absence of the traditional "inflation bias." This paper quantifies the welfare differential between precommitment and discretionary policy in both a...

The "conservative central banker" has come under attack recently. Explicitly modeling the interaction of a trade union with monetary policy, it has been argued that the standard solution to the inflationary bias in monetary policy might actually be welfare reducing if the trade union has an...

The desirability of flexible exchange rates is a central tenet in international macroeconomics. We show that, with forward-looking staggered pricing, this result crucially depends on the monetary authority's ability to commit. Under full commitment, flexible exchange rates generally dominate a...

This paper studies monetary regime choice between monetary union and flexible exchange rate regime in a large open economy framework. The classical approach emphasizes that monetary unions are inherently costly because a single interest rate cannot respond effectively to different shocks of...