Frameworks For The Theoretical And Empirical Analysis Of Monetary Policy

Monetary policy has been very successful in most countries in recent years. Average inflation rates have declined considerably since the 1980s. Furthermore, a number of authors such as Stock and Watson (2002) and Martin and Rowthorn (2005) also attribute the observed decline in macroeconomic volatility, i.e. in the variance of inflation and output, at least partly to better monetary policy. But the last decade has not passed without new challenges for central banking in theory and practice. In theory, the New Keynesian or New Neoclassical Synthesis model became the standard workhorse for monetary macroeconomics and some of its most prominent proponents such as Woodford (2003) argued for a new 'timeless-perspective' approach to policy as the allegedly optimal monetary policy.