This project is concerned with the theoretical analysis of alternative rules for monetary policy. More specifically, the aim is to better understand the consequences of policy rules that involve use of a short-term interest rate as the instrument in terms of which the monetary authority formulates its policy over short periods of time. The project will also consider the extent to which interest-rate smoothing conflicts with other aims of policy, including both price-level stabilization and stabilization of output and employment. The research seeks to bring the theoretical literature in monetary economics into closer contact with the problems of contemporary monetary policy. The theoretical literature to date has largely conceived of monetary policy in terms of alternative paths for a monetary aggregate, which is treated as being under the direct control of the monetary authority. But, while operating procedures of that sort have often been advocated by academic critics of central bank policies, central banks have seldom operated in that way. Recently the U.S. Federal Reserve has ceased to use monetary aggregates as guides to policy, even in the role of intermediate targets. A theoretical understanding of the properties of the kinds of procedures currently being used or contemplated is badly needed. ***
