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We consider optimal monetary policy in New Keynesian models with inertia due to lagged effects of inflation and output. We characterize the conditions for the unconditionally optimal equilibrium and compare them with those identifying optimality from the timeless perspective. Implementation of optimal policy is considered via construction of suitable interest-rate rules. We characterize the collection of all interest-rate rules consistent with the optimal equilibrium, and we identify among them an expectations-based rule that guarantees uniqueness and stability under learning.
Keywords: monetary policy; Taylor rules; indeterminacy; E-stability
Published Online: 2010-3-6
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston