Essays on optimal monetary policy

This dissertation seeks to characterize optimal monetary policy in the context of optimizing models that incorporate nominal price stickiness. I assume control of short-term nominal interest rate by the central bank, and inflation and output are then determined by intertemporal-optimizing versions of an IS curve and a Phillips curve. An advantage of the use of optimizing models is that I can then evaluate alternative policies in terms of a loss function that is itself theoretically justified in terms of individual welfare.;The first chapter considers how the characterization of optimal policy is affected by allowing for the existence of flexible-price as well as sticky-price sectors of the economy, and sector-specific supply shocks that affect the efficient relative prices of the different types of goods. The optimal equilibrium can be characterized as an inflation targeting regime, once one chooses the correct inflation measure. We show that it is desirable to stabilize core inflation rather than a broader measure of inflation, where core inflation is identified as an index of inflation in the sticky-price sector.;In the second and the third chapter, we abstract from the issue of sector-specific supply shocks, and focus more on the problem of implementation of optimal monetary policy. Specifically, we consider the implications of noisy information regarding the measurement of economic activity for optimal monetary policy. The second chapter derives an optimal policy under discretion. The optimal monetary policy can be characterized as a Taylor-type rule, which responds to the current measures of inflation and output. It is also shown that the noise justifies a degree of policy cautiousness. The third chapter extends the analysis of the second chapter to derive an optimal monetary policy under commitment. It is shown that, if current policy turns out to be too expansionary (contractionary) due to data uncertainty, then subsequent policies should be slightly contractionary (expansionary). By taking this strategy, the central bank can improve the trade-off between the variability of its goal variables due to underlying economic shocks and their variability due to its response to the noise.