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Discretion, wage indexation, and inflation
The Fed's bloated balance sheet: how we got here and why it's familiar
Quantitative easing has led to the largest expansion of the Fed?s balance sheet since WW II. While this, naturally, leads to concern about inflation, the Fed has the tools to unwind the balance sheet once the economy builds steam.
Performance contracts for central bankers
Price level targeting and stabilization policy
We construct a dynamic stochastic general equilibrium model to study optimal monetary stabilization policy. Prices are fully flexible and money is essential for trade. Our main result is that if the central bank pursues a price-level target, it can control inflation expectations and improve welfare by stabilizing short-run shocks to the economy. The optimal policy involves smoothing nominal interest rates which effectively smooths consumption across states.