Monetary Policy Design

rules—their dependence on a particular model specification. Two building blocks are required to define a targeting rule: a macro model and an objective (loss) function for the central bank. The model of this article consists of two equations representing the aggregate demand and aggregate supply behav-ior. It is a semi-structural model that allows for both backward-looking and forward-looking dynamics on inflation and the output gap while retaining much of the flavor of the New Keynesian model.1 As for the central-bank loss function, it implies that monetary policy targets the volatilities of inflation, the output gap, and the nominal inter-est rate. This loss function is not directly obtaine