Active interest rate policy is frequently recommended based on its merits in reducing macroeconomic volatility and being a simple device. Yet, it might be outperformed by an even simpler policy. A peg can be welfare-enhancing and can uniquely be implemented.

We analyze optimal monetary policy in a sticky price model with open market operations. The central bank sets the policy rate and can, additionally, control the amount of money by rationing money supplied against eligible securities. Optimal policy under money rationing is shown to enhance...

We analyze the impact of interactions between monetary and fiscal policy on macroeconomic stability. We find that in the presence of sovereign default, macroeconomic stability requires monetary policy to be passive if the feedback from debt surprises back to the primary surplus is too weak. An...

This paper examines the role of the monetary instrument choice for local equilibrium determinacy under sticky prices and different fiscal policy regimes. Corresponding to Benhabib et al.'s (2001) results for interest rate feedback rules, the money growth rate should not rise by more than one for...

This paper examines monetary policy implementation in a sticky price model. The central bank’s plan under discretionary optimization is entirely forward-looking and exhibits multiple equilibrium solutions if transactions frictions are not negligibly small. The central bank can then implement...

In this paper the relation between interest rate targets and money supply is analysed in a standard macroeconomic framework with frictionless financial markets and sticky prices. Money supplies are examined that implement equilibrium sequences satisfying forward-looking interest rate targets. An...