ABSTRACT
This chapter extends the earlier discussions about the actions of the monetary authority and how these actions affect the macroeconomy. Perhaps the most interesting issue of monetary economics is addressed here, that is, the optimal role of monetary policy. The chapter highlights the differences in model results that depend on what type of expectations are assumed. Particular attention is given to the Sargent and Wallace “ineffectiveness propositions” and the Phillips curve. Other issues are then introduced, including the “rule versus discretion” debate, time inconsistency, and the role of credibility and enforcement.
