This paper develops a basic model for output fluctuations in traded and non-traded sectors under two alternative monetary policy regimes; exchange rate targeting (or monetary union) and inflation targeting. The conventional wisdom from one-sector models says that inflation targeting gives better...

Monetary policy decisions are typically characterized by three features: (i) decisions are made by a committee, (ii) the committee members often disagree, and (iii) the chairman is almost never on the losing side in the vote. We show that the combination of overconfident policymakers and a...

The discursive dilemma implies that the decision of a board depends on whether the board votes directly on the decision (conclusion-based procedure) or votes on the premises for the decision (premise-based procedure). We derive results showing when the discursive dilemma might occur. Under...

A discretionary monetary policy leads to suboptimal stabilization in models with the New Keynesian assumption of forward-looking price setting, and various policy rules that improve the discretionary equilibrium have been considered in the literature. The empirical evidence for forward-looking...

Several countries face the choice between targeting inflation independently and entering a monetary union that targets inflation. The present paper extends the theory of optimum currency areas to deal with this choice. In contrast to the conventional theory, countries might form more of an...