This paper examines the relative merits of alternative monetary policy rules for a small open economy. Rules considered target: the exchange rate, price level, nominal income, or a monetary aggregate. The standard framework employed in previous comparisons of these rules fails to take account of...

Central banks frequently apply target rules or instrument rules in the conduct of monetary policy. For a central bank with multiple target variables such as the Federal Reserve's ‘dual mandate’, a target rule expresses the desired values for each target and the relative weight given to each....

A weight-conservative central banker setting policy with discretion and stabilizing the real exchange-rate-adjusted (REX) price level and the output gap can replicate the behavior of the rate of REX inflation and the output gap under policy from a timeless perspective.

In the backward-looking model, an explicit instrument rule is almost as efficient as a target rule. An explicit instrument rule leads to a more stable real rate of interest and hence an output stabilization bias compared to the target rule.

Recently there has been a resurgence of interest in the study of optimal monetary policy under uncertainty. This book provides a thorough survey of the literature that has resulted from this renewed interest. The authors ground recent contributions on the ‘science of monetary policy’ in the...