Active interest rate policy is frequently recommended based on its merits in reducing macroeconomic volatility and being a simple and transparent policy device. In a standard New Keynesian model,we show that an even simpler policy, namely an interest rate peg, can be welfare enhancing: The...

Active interest rate policy is frequently recommended based on its merits in reducing macroeconomic volatility and being a simple and transparent policy device. In a standard New Keynesian model, we show that an even simpler policy, namely an interest rate peg, can be welfare enhancing: The...

We ask how including endogenous capital formation into a New-Keynesian model affects optimal monetary policy. We find that the response of Ramsey optimal policy to a persistent cost-pushing shock is unconventional: In response to the shock, the central bank persistently reduces the nominal...