This note deals with interest-rate setting in a simple dynamic macroeconomic setting. The purpose is to present some basic and central properties of an optimal interest-rate rule. The model framework predates the New-Keynesian paradigm of the late 1990s and onwards (it is accordingly dubbed “Old-Keynesian” by, e.g., Cochrane, 2011), but the simplicity of the framework allows clear-cut results to be stated, and fundamental properties of infl‡ation-targeting regimes to be analyzed.
The exposition builds to some extent on Svensson (1997) and Walsh (2003, Section
10.4.2), and merges these presentations into one model.