Table Of ContentHANDBOOK OF
MONETARY
ECONOMICS
3B
VOLUME
INTRODUCTION TO THE SERIES
The aim of the Handbooks in Economics series is to produce Handbooks for various
branches of economics, each of which is a definitive source, reference, and teaching
supplement for use by professional researchers and advanced graduate students. Each
Handbook provides self-contained surveys of the current state of a branch of economics
in the form of chapters prepared by leading specialists on various aspects of this branch
of economics. These surveys summarize not only received results but also newer
developments, from recent journal articles and discussion papers. Some original material
is also included, but the main goal is to provide comprehensive and accessible surveys.
The Handbooks are intended to provide not only useful reference volumes for
professional collections but also possible supplementary readings for advanced courses
for graduate students in economics.
KENNETH J. ARROW and MICHAEL D. INTRILIGATOR
HANDBOOK OF
MONETARY
ECONOMICS
3B
VOLUME
Edited by
BENJAMIN M. FRIEDMAN
MICHAEL WOODFORD
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ISBN Vol3B:978-0-444-53454-5
ISBN Vol3A:978-0-444-53238-1
SETISBN:978-0-444-53470-5
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11 12 13 10 9 8 7 6 5 4 3 2 1
CONTENTS-VOLUME 3B
Contributors xv
Preface xvii
Part Four: Optimal Monetary Policy
13. The Optimal Rate of Inflation 653
Stephanie Schmitt-Grohé andMartín Uribe
1. Introduction 654
2. Money Demand andtheOptimal RateofInflation 658
3. Money Demand, Fiscal PolicyandtheOptimal RateofInflation 664
4. Failure ofthe Friedman Rule Dueto UntaxedIncome:Three Examples 667
5. AForeign Demand ForDomestic CurrencyandtheOptimal RateofInflation 675
6. Sticky PricesandtheOptimal RateofInflation 684
7. TheFriedman Rule Versus Price-Stability Trade-Off 695
8. Does theZero BoundProvide a Rationale forPositiveInflation Targets? 701
9. Downward Nominal Rigidity 704
10. Quality BiasandtheOptimal RateofInflation 706
11. Conclusion 715
References 720
14. Optimal Monetary Stabilization Policy 723
MichaelWoodford
1. Introduction 724
2. Optimal Policyin aCanonical NewKeynesian Model 726
3. Stabilization andWelfare 759
4. Generalizations ofthe BasicModel 790
5. Research Agenda 818
References 826
15. Simple and Robust Rules for Monetary Policy 829
John B. Taylor andJohn C. Williams
1. Introduction 830
2. Historical Background 830
3. Using Models toEvaluate Simple PolicyRules 833
v
vi Contents-Volume3B
4. Robustness ofPolicyRules 844
5. Optimal PolicyVersusSimple Rules 850
6. Learning from Experience Before, During andaftertheGreat Moderation 852
7. Conclusion 855
References 856
16. Optimal Monetary Policy in Open Economies 861
Giancarlo Corsetti, Luca Dedola, and SylvainLeduc
1. Introduction andOverview 862
2. Part I:Optimal Stabilization PolicyandInternational RelativePrices with
Frictionless AssetMarkets 869
3. ABaseline MonetaryModel ofMacroeconomic Interdependence 870
4. TheClassical View:Divine Coincidence in OpenEconomies 886
5. Skepticism on theClassicalView: LocalCurrency Price Stability ofImports 894
6. Deviations fromPolicyCooperation andConcerns with “Competitive Devaluations” 909
7. Part II: CurrencyMisalignments and Cross-Country Demand Imbalances 915
8. Macroeconomic InterdependenceUnderAsset Market Imperfections 915
9. Conclusions 928
References 929
Part Five: Constraints on Monetary Policy
17. The Interaction Between Monetary and Fiscal Policy 935
MatthewCanzoneri, RobertCumby, andBehzadDiba
1. Introduction 936
2. Positive TheoryofPrice Stability 937
3. Normative Theory ofPrice Stability: IsPrice Stability Optimal? 973
References 995
18. The Politics of Monetary Policy 1001
Alberto Alesinaand AndreaStella
1. Introduction 1002
2. Rules VersusDiscretion 1003
3. Central Bank Independence 1013
4. Political BusinessCycles 1027
5. Currency Unions 1034
6. TheEuro 1041
7. Conclusion 1046
References 1050
Contents-Volume3B vii
19. Inflation Expectations, Adaptive Learning and Optimal Monetary Policy 1055
Vitor Gaspar, FrankSmets, and DavidVestin
1. Introduction 1056
2. Recent Developmentsin Private-Sector Inflation Expectations 1059
3. ASimple New KeynesianModel ofInflationDynamics Under Rational Expectations 1061
4. Monetary PolicyRulesAnd Stability UnderAdaptiveLearning 1065
5. Optimal MonetaryPolicyUnder AdaptiveLearning 1071
6. Some FurtherReflections 1089
7. Conclusions 1091
References 1092
20. Wanting Robustness in Macroeconomics 1097
Lars Peter Hansenand ThomasJ. Sargent
1. Introduction 1098
2. Knight, Savage, Ellsberg, Gilboa-Schmeidler, andFriedman 1100
3. Formalizing a TasteforRobustness 1104
4. Calibrating aTasteforRobustness 1109
5. Learning 1117
6. Robustness inAction 1133
7. Concluding Remarks 1148
References 1155
Part Six: Monetary Policy in Practice
21. Monetary Policy Regimes and Economic Performance:
The Historical Record, 1979–2008 1159
Luca Benati and CharlesGoodhart
1. Introduction 1160
2. Monetary Targetry, 1979–1982 1168
3. Inflation Targets 1183
4. The“Nice Years ,” 1993–2006 1185
5. Europe and theTransitionto theEuro 1204
6. Japan 1209
7. Financial Stability and MonetaryPolicyDuring theFinancial Crisis 1216
8. Conclusions andImplications forFuture Central BankPolicies 1221
References 1231
viii Contents-Volume3B
22. Inflation Targeting 1237
Lars E.O.Svensson
1. Introduction 1238
2. History andMacroeconomic Effects 1242
3. Theory 1250
4. Practice 1275
5. Future 1286
References 1295
23. The Performance of Alternative Monetary Regimes 1303
Laurence Ball
1. Introduction 1304
2. Some Simple Evidence 1306
3. Previous Workon InflationTargeting 1313
4. TheEuro 1318
5. TheRole ofMonetaryAggregates 1325
6. Hard CurrencyPegs 1328
7. Conclusion 1332
References 1341
24. Implementation of Monetary Policy:
How Do Central Banks Set Interest Rates? 1345
Benjamin M. Friedmanand Kenneth N.Kuttner
1. Introduction 1346
2. Fundamental Issues in theModeofWicksell 1353
3. TheTraditional Understandingof “Howthey dothat” 1360
4. Observed Relationships BetweenReserves andthePolicyInterest Rate 1375
5. How, Then,Do Central BanksSet Interest Rates? 1385
6. Empirical Evidenceon ReserveDemand andSupply within the
Maintenance Period 1399
7. New Possibilities Foll owingthe2007–2009 Crisis 1414
8. Conclusion 1432
References 1433
25. Monetary Policy in Emerging Markets 1439
Jeffrey Frankel
1. Introduction 1441
2. Why Do WeNeedDifferent ModelsforEmerging Markets? 1443
3. Goods Markets, Pricing, andDevaluation 1445
Contents-Volume3B ix
4. Inflation 1453
5. Nominal Targets forMonetaryPolicy 1456
6. Exchange RateRegimes 1461
7. Procyclicality 1465
8. Capital Flows 1472
9. Crises in Emerging Markets 1481
10. Summary ofConclusions 1498
References 1499
Index-Volume3B I1
Index-Volume3A I41
