In this article, I examine the current state of knowledge about optimal monetary policy. I distinguish between two literatures, basic and applied. The basic literature is explicit about the frictions that generate a positive value for money and make it socially beneficial. The applied literature is not. I describe the recent lessons about monetary policy that we have learned from each literature and discuss how the two distinct approaches may be usefully combined.
Reprinted, with permission, from the International Economic Review (May 2005, vol. 46, no. 2, pp. 715–29): “Optimal Monetary Policy: What We Know and What We Don’t Know” by Narayana R. Kocherlakota. © 2005 by Blackwell Publishing. https://doi.org/10.1111/j.1468-2354.2005.00343.x