We study optimal monetary policy in a two-sector model. The conventional wisdom in the literature is that the monetary authority should optimally stabilize inflation in the sticky-price sector. We reassess this issue in a two sector economy with capital accumulation subject to adjustment costs....

We evaluate the case for perfect price (inflation) stabilization in a New Keynesian (NNS) model that includes capital accumulation, a variety of shocks, a monetary and an imperfect competition distortion. In such a model, price rigidity may provide the monetary authorities with an opportunity to...

The natural rate of interest -- the real interest rate consistent with output equaling potential -- plays an important role in both economic forecasting and monetary policy. Much of the literature has assumed that the natural rate of interest is constant. For example, the Taylor rule includes a...

We study in a VAR model the effects of monetary policy shocks with new Italian flow of funds data for 1980-2002. First, our results are consistent with the literature, without being affected by commonly found puzzles. Second, new features of the transmission of monetary policy shocks to the...

We study how determinacy and learnability of global rational expectations equilibrium may be affected by monetary policy in a simple, two country New Keynesian framework. We seek to understand how monetary policy choices may interact across borders to help or hinder the creation of a unique REE...

I introduce a method to transform a T-map when agents form expectations using a misspecified learning mechanism inconsistent with a structural equation of a multivariate economic model. By transforming the perceived law of motion (PLM) into a the form of a Seemingly Unrelated Regression (SUR)...

The monetary policy literature has recently devoted considerable attention to Taylor-type rules, in which the interest rate set by the central bank depends on measures of inflation and aggregate output. We show that if policy-makers attempt to choose the optimal rule within a Taylor-type...

This paper investigates the precision of multivariate models of the output gap and considers their implications for the formulation of macroeconomic policy. Multivariate models identify the gap by including information from structural economic relationships, such as Okun's Law, the Phillips...

The lack of euro area labour market flexibility is a commonly mentioned issue. In particular, the relatively weak response of wages to high unemployment can pose adjustment problems. We address the issue using extensive simulations of an estimated macro-econometric model for the euro area (the...