In recent years, the relevance of money growth indicators for the conduct of monetary policy has been questioned in the mainstream academic literature. It is widely argued that monetary policy should directly relate short-term interest rates to inflation and the output gap. The present paper...

Using a standard New-Keynesian model, this paper examines three reasons why monetary policy should primarily focus on price stability rather than the stabilization of output around potential, even if there appears to be an exploitable trade-off between the volatility of inflation and that of the...