Research Discussion Paper – RDP 2009-01 Currency Misalignments and Optimal Monetary Policy: A Re-examination

Contents

• Introduction
• The Model
• Log-linearised Model
• Loss Functions and Optimal Policy
• Price and Wage Setting
• Log-linearised Phillips Curves
• Optimal Policy under PCP
• Optimal Policy under LCP
• The Interest Rate Reaction Functions
• Conclusions
• Appendix A: Log-linearised Model
• Appendix B: Welfare Functions and Other Derivations
• References

Department of Economics, University of Wisconsin, 1180 Observatory Drive, Madison, WI, 53706-1393, USA. I am indebted very much to Mick Devereux, Jon Faust, Lars Svensson and Mike Woodford for comments and suggestions that motivated this work. I thank Christopher Kent for many useful comments on an earlier draft of this paper. Some of the work for this paper was undertaken while the author was visiting the Reserve Bank of Australia. The views expressed in this paper do not necessarily reflect the views of the Reserve Bank of Australia.