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...

In the empirical literature, monetary policy shocks are commonly measured as an innovation to a short-term nominal interest rate. In contrast, the majority of monetary business cycle models treats a broad monetary aggregate as the central bank's policy measure. We try overcome this disparity and...

This paper presents a business cycle analysis of monetary policy shocksmeasured by disturbances to open market operations, i.e. the ratio of open market papers to non-borrowed reserves. We find empirical evidence for the usefulness of this policy measure, as it predicts significant declines in...