We examine the frequency of price changes for 350 categories of goods and services covering about 70 % of consumer spending, based on unpublished data from the BLS for 1995 to 1997. Compared with previous studies we find much more frequent price changes, with half of goods' prices lasting less than 4.3 months. Even excluding the role of temporary price cuts (sales), we find that half of goods' prices last 5.5 months or less. The frequency of price changes differs dramatically across categories. We exploit this variation to ask how inflation for "flexible-price goods" (goods with frequent changes in individual prices) differs from inflation for "sticky-price goods" (those displaying infrequent price changes). Compared to the predictions of popular sticky price models, actual inflation rates are far more volatile and transient, particularly for sticky-price goods.

The goal of this paper is to compute optimal monetary and fiscal policy rules in a real business cycle model augmented with sticky prices, a demand for money, taxation, and stochastic government consumption. We consider simple policy rules whereby the nominal interest rate is set as a function of output and inflation, and taxes are set as a function of total government liabilities. We require policy to be implementable in the sense that it guarantees uniqueness of equilibrium. We do away with a number of empirically unrealistic assumptions typically maintained in the related literature that are used to justify the computation of welfare using linear methods. Instead, we implement a second-order accurate solution to the model. Our main findings are: First, the size of the inflation coefficient in the interest-rate rule plays a minor role for welfare. It matters only insofar as it affects the determinacy of equilibrium. Second, optimal monetary policy features a muted response to output. More importantly, interest rate rules that feature a positive response of the nominal interest rate to output can lead to significant welfare losses. Third, the optimal fiscal policy is passive. However, the welfare losses associated with the adoption of an active fiscal stance are negligible.

Nominal income rules for monetary policy have long been debated, but two issues are of particular recent interest. First, there are questions about the performance of such rules over a range of plausible empirical models – especially models with and without explicit rational inflation expectations. Second, there are questions about the performance of these rules in real time using the type of data that is actually available contemporaneously to policy makers rather than final revised data. This paper determines optimal monetary policy rules in the presence of such model uncertainty and real-time data uncertainty and finds only a limited role for nominal output growth.

This paper analyses the implications of imperfect exchange rate pass-through for optimal monetary policy in a linearised open-economy dynamic general equilibrium model calibrated to euro area data. Imperfect exchange rate pass through is modelled by assuming sticky import price behaviour. The degree of domestic and import price stickiness is estimated by reproducing the empirical identified impulse response of a monetary policy and exchange rate shock conditional on the response of output, net trade and the exchange rate. It is shown that a central bank that wants to minimise the resource costs of staggered price setting will aim at minimising a weighted average of domestic and import price inflation.

This paper evaluates the welfare implications of monetary policy rules when international financial markets are incomplete. Using a two-country dynamic general equilibrium monetary model, we evaluate the magnitude of the costs of imperfect risk sharing. Under a price stability policy in both countries, they are in the range of 0.07-0.70 percent of a permanent shift in steady-state consumption. These costs are significant, possibly even higher than the costs induced by the volatility of the business cycle, as found by Lucas (1987). Most important, we find that with non-zero holdings of net foreign assets, there exist non-negligible gains from following a coordinated monetary policy instead of a price-stability policy. These gains are in the range of 0.01-0.10 percent of a permanent shift in steady-state consumption. I am grateful for helpful discussions and comments to Alberto Bisin, Gianluca Benigno, Matthew

This paper considers a prototypical monetary business cycle model for the U.S. economy, in which the equilibrium is undetermined if monetary policy is `passive'. In previous multivariate studies it has been common practice to restrict parameter estimates to values for which the equilibrium is unique. We show how the likelihood-based estimation of dynamic stochastic general equilibrium models can be extended to allow for indeterminacies and sunspot fluctuations. We construct

Introduction John Taylor (1993) has proposed that U.S. monetary policy in recent years can be described by an interest-rate feedback rule of the form i t = .04 + 1.5(# t - .02) + .5(y t - y t ), (1.1) where i t denotes the Fed's operating target for the federal funds rate, # t is the inflation rate (measured by the GDP deflator), y t is the log of real GDP, and y t is the log of "potential output" (identified empirically with a linear trend). ). The rule has since been subject to considerable attention, both as an account of actual policy in the U.S. and elsewhere, and as a prescription for desirable policy. Taylor argues for the rule's normative significance both on the basis of simulations and on the

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helpful conversation and Philip Jefferson for providing data on currency holdings. In addition, we would like to thank participants in the Banco de Portugal Conference on Monetary Economics, the June 2000 meetings of the Society for Economic Dynamics, and seminar participants at Rutgers. Errors are our own. The views expressed here are the authors ’ and not necessarily those of the Federal Reserve Banks of Philadelphia or Richmond or the Federal Reserve System. 1

Schorfheide was visiting the Federal Reserve Bank of Philadelphia, for whose hospitality is thankful. Financial sup-