Optimal monetary policy rules are derived in a rational expectations cum contracting framework. Monetary policy is redundant if wage setters exploit the incomplete current information embodied in today's nominal interest rate. However, the monetary authorities can save wage setters the costs of "indexing" to the interest rate. A contemporaneous money supply feedback rule is as effective as wage indexation. A lagged rule, relevant under a regime of money supply targeting, is also as effective if investors use the interest rate. Both rules have the same implications for the real interest rate as Poole's combination policy. However, the two rules have strikingly different implications for the nominal interest rate.
Negative net foreign asset and positions have been associated with a troublesome stability problem in flexible exchange rate regimes. In this paper, a symmetrically-specified, two-country, portfolio balance model is employed to provide some perspective on this problem. It is concluded that negative negative net foreign asset positions do not constitute an independent source of instability. Instability can arise only under nonrational expectations or because of destabilizing speculation.