The authors propose a monetary policy rule for the Terms-of-Trade Economic Model (ToTEM), the Bank of Canada's new projection and policy-analysis model for the Canadian economy.
The authors analyze the welfare implications of simple monetary policy rules in the context of an estimated model of a small open economy for Canada with traded and non-traded goods, and with sticky prices and wages.
In the United States, the Federal Reserve has a dual mandate of promoting stable inflation and maximum employment. Since the Fed directly controls only one instrument - the federal funds rate - the authors argue that the Fed's priorities continuously alternate between inflation and economic activity.