This paper considers the optimal degree of discretion in monetary policy when the central bank conducts policy based on its private information about the state of the economy and is unable to commit. Society seeks to maximize social welfare by imposing restrictions on the central bank's actions...

Time-inconsistency is an essential feature of many policy problems (Kydland and Prescott, 1977). This paper presents and compares three methods for computing Markov-perfect opti- mal policies in stochastic nonlinear business cycle models. The methods considered include value function iteration,...

Discretionary policymakers cannot manage private-sector expectations and cannot coordinate the actions of future policymakers. As a consequence, expectations traps and coordination failures can occur and multiple equilibria can arise. To utilize the explanatory power of models with multiple...

This paper studies the behavior of a central bank that seeks to conduct policy optimally while having imperfect credibility and harboring doubts about its model. Taking the Smets-Wouters model as the central banks approximating model, the papers main fi…ndings are as follows. First, a central...

Ball (1997) shows using a small closed economy model that nominal GDP targeting can lead to instability. This paper extends Ball's model to uncover the role inflation expectations play in generating this instability. By changing the process by which inflation expectations are formed in the...

We study the effects of optimized monetary policy in a semi-structural, estimated small open economy in situations where the policymaker has either complete or less than complete confidence in the model being free from misspecification errors. We use the robust control techniques developed by...

This paper uses a small data-consistent model of the United States to identify and estimate the Federal Reserve's policy preferences. We find critical differences between the policy regimes in operation during the Burns-Miller and Volcker-Greenspan periods. Over the Volcker-Greenspan period we...

Economic outcomes in dynamic economies with forward-looking agents depend crucially on whether or not the central bank can precommit, even in the absence of the traditional "inflation bias." This paper quantifies the welfare differential between precommitment and discretionary policy in both a...

This paper solves for optimal policy rules in a stylized small open economy model under a spectrum of targeting regimes. These policy reaction functions are presented as feedback rules highlighting the dominant state variables in each rule. Optimal simple rules - rules that exploit a reduced...