Working Paper: CEPR ID: DP2139
Authors: Richard Clarida; Jordi Gal; Mark Gertler
Abstract: This paper reviews the recent literature on monetary policy rules. We exposit the monetary policy design problem within a simple baseline theoretical framework. We then consider the implications of adding various real world complications. Among other things, we show that the optimal policy implicitly incorporates inflation targeting. We also characterize the gains from making credible commitments to fight inflation. In contrast to conventional wisdom, we show that gains from commitment may emerge even if the central bank is not trying to inadvisedly push output above its natural level. We also consider the implications of frictions such as imperfect information.
Keywords: monetary policy; credibility; stabilization; New Keynesian models
JEL Codes: E0; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Credibility of the central bank (E58) | Inflation targeting (E31) |
| Inflation targeting (E31) | Effectiveness of monetary policy (E52) |
| Monetary policy (E52) | Aggregate demand (E00) |
| Expected future inflation (E31) | Nominal interest rates (E43) |
| Demand shocks (E39) | Monetary policy adjustments (E52) |
| Supply shocks (E39) | Monetary policy adjustments (E52) |