Title page

Contents

Abstract 2

1. Introduction 3

2. A Model of Optimal (Discretionary) Policy When Activity Shortfalls Are Costly 5

3. Additional considerations 13

4. Conclusions 16

References 17

Figure 1. Outcomes under the optimal policy for asymmetric and symmetric loss functions 12

Figure 2. Losses for alternative central bank weights on activity (αl=0.25, αh=0) 13