Inflation-targeting regimes (like those of New Zealand, Canada, the United Kingdom, and Sweden) are interpreted as having explicit inflation targets and implicit employment targets. Without employment persistence, an "inflation-target-conservative" central bank eliminates the inflation bias, mimics an optimal inflation contract, and dominates a Rogoff "weight-conservative" central bank. With employment persistence, a state-contingent inflation bias and a stabilization bias also arise. A constant inflation target and a constant inflation contract are still equivalent. A state-contingent inflation target combined with a weight-conservative central bank can achieve the equilibrium corresponding to an optimal rule under commitment.

A theory of the international trade pattern in risky assets is developed by applying the law of comparative advantage to asset trade. According to this law there is a tendency for a country to import assets that have relatively high autarky prices. It is examined how autarky prices are affected by international differences in (i) stochastic properties of output/endowments, (ii) the rate of time preference, (iii) the degree of risk aversion, and (iv) subjective beliefs, and how such differences predict overall capital account deficits or surpluses as well as the composition of the capital account into trade in specific risky assets.

The paper examines the effect of terms-of-trade changes on a small country's spending and current account, assuming optimizing behavior in an intertemporal framework with perfect international capital mobility. A temporary (future) terms-of-trade deterioration implies a deterioration (improvement) of the trade balance, whereas a permanent terms-of-trade deterioration has an ambiguous effect, depending on the rate of time preference. Nominal and real variables are considered via exact price indexes. Two periods and an infinite horizon are examined.

It is argued that inflation targeting is best understood as a commitment to a targeting rule rather than an instrument rule, either a general targeting rule (explicit objectives for monetary policy) or a specific targeting rule (a criterion for the forecasts of the target variables to be fulfilled), essentially the equality of the marginal rates of transformation and substitution between the target variables. Targeting rules allow the use of judgment and extra model information, are more robust and easier to verify than optimal instrument rules, and can bring the economy close to the socially optimal equilibrium.

It is argued that inflation targeting is best understood as a commitment to a targeting rule rather than an instrument rule, either a general targeting rule (explicit objectives for monetary policy) or a specific targeting rule (a criterion for (the forecasts of) the target variables to be fulfilled), essentially the equality of the marginal rates of transformation and substitution between the target variables. Targeting rules allow the use of judgment and extra-model information, are more robust and easier to verify than optimal instrument rules, and they can nevertheless bring the economy close to the socially optimal equilibrium.

It is argued that inflation targeting is best understood as a commitment to a targeting rule rather than an instrument rule, either a general targeting rule (explicit objectives for monetary policy) or a specific targeting rule (a criterion for (the forecasts of) the target variables to be fulfilled), essentially the equality of the marginal rates of transformation and substitution between the target variables.Targeting rules allow the use of judgment and extra-model information, are more robust and easier to verify than optimal instrument rules, and they can nevertheless bring the economy close to the socially optimal equilibrium.

A monetary general equilibrium asset-pricing model with sticky goods prices is developed. Goods prices are set by monopolistically competitive firms that maximize stock market value. Equilibria with underutilization of resources, excess capacity, in some states result, in contrast to previous monetary asset-pricing models. The degree of competition affects capacity utilization. Monetary policy can affect output and resource utilization, in addition to real asset prices, depending upon the amount of information available to the monetary authority.