The science of monetary policy: A new Keynesian perspective

This paper reviews the recent literature on monetary policy rules. We exposit the monetary policy design problem within a simple baselinetheoretical 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. Wealso characterize the gains from making credible commitments to fightinflation. In contrast to conventional wisdom, we show that gains from commitment may emerge even in the central bank is not trying toinadvisedly push output above its natural level. We also consider theimplications of frictions such as imperfect information.