Optimal monetary policy and inflation targeting

In the first essay I focus on the gains from precommitment to an optimal policy rule in a two-country linear-quadratic rational expectations model based on Fuhrer and Moore (1995). The model is first calibrated for a symmetric world, then for values based on the EMU and the UK. I find that there are gains from precommitment due to endogamous persistence, even when the central bank does not try to push output above potential. If the EMU has a lower real interest rate elasticity of output, and the ECB cooperates with the Bank of England, the UK should move interest rates more aggressively.; In the second essay I use a New Keynesian model to study the design of optimal monetary policy in a monetary union and its effects on the member countries. Using a calibrated two-country model, I explore the impact of policy when the monetary transmission mechanism differs between the two countries. I find that when the ECB responds to aggregate output deviations from target, rather to individual output deviations from target, both countries are better off, and the volatility of inflation and aggregate output is constant.; In the last essay I use a set of alternative credibility measures to analyze whether an inflation-targeting regime helps improve the credibility of a central bank. The first set of credibility measures considers whether disinflation has been achieved at a lower cost due to a "credibility effect", or if inflation has come down for targeters to a greater extent than normally attributed to cyclical factors. The second type of measures assess whether the interactions between inflation and real variables have changed as a result of credibility enhancement. The third set of measures examine whether private-sector inflation expectations have come down after targeting beyond the values usually associated with a drop in inflation. I find that there are credibility gains from implementing inflation targeting, but they come gradually, at different speeds in different markets. More importantly, similar countries achieved similar inflation stabilizations without implementing inflation targeting.