The purpose of this paper is the examination of whether a strategy of using forecasts to stabilise the Nominal Gross Domestic Product (NGDP) growth rate as a nominal anchor, through a rules-based approach to monetary policy is viable in the Eurozone. The paper uses a modified Taylor rule, that uses NGDP forecasts as a variable to generate a prescribed interest rate from which the interest rate set by the European Central Bank (ECB) is subtracted to create a variable we call the Rate Gap. The Rate Gap is a measure of deviation that actual monetary policy had from a country’s optimal rate at a given moment in time according to the Taylor rule.  Under the hypothesis that a strategy of using forecasts to stabilise the NGDP growth rate as a nominal anchor is viable, we should expect to see countries with larger positive (negative) rate gaps have macroeconomic outcomes associated with monetary contraction (expansion). The empirical results in this paper contradict the former hypothesis as different countries have dissimilar rate gaps at the same time period which is affirmation of the Eurozone being a suboptimal currency area. However, they are supportive of the latter hypothesis, as countries with larger positive (negative) rate gaps tended to have macroeconomic outcomes associated with monetary contraction (expansion). This paper also discusses the impact of different monetary transmission mechanisms and their relationship to fiscal policy. It also contributes to the field of macroeconomics through its examination of the problem of finding viable policy strategies for a suboptimal currency area.

The subject of this dissertation is nominal GDP (NGDP) targeting. In the wake of the Great Recession, some economists have proposed using some form of NGDP target to replace current monetary policy. We evaluate the desirability of NGDP targets based upon their ability to deliver unique and \learnable" equilibria and their welfare gains in the presence of nancial frictions. In the second chapter, we assess the determinacy and E-stability conditions for simple interest rate rules which respond to NGDP's deviation from target in a simple three-equation New Keynesian model. The rules under consideration target either NGDP level or growth, and can either be contemporaneous, one period ahead, or two periods ahead. We also allow for dierent types of information sets for the agents. In the third chapter, we compare welfare loss in consumption equivalent terms for NGDP targets with more conventional monetary policy in a New Keynesian model which features nancial frictions. Finally, in the fourth chapter we continue our analysis from chapter one but now allow for strictly positive trend inflation. We present findings for the relationship between trend inflation and the determinacy and E-stability of the equilibrium when using interest rate rules that target NGPD.

This thesis examines whether the McCallum´s rule, which targets nominal GDP using the monetary base as its instrument, would be more successful in achieving the goal of smoother path of nominal GDP with inflation staying on target, had it been in place of the actual historical monetary policy in the Czech Republic. To assess the performance of McCallum´s rule, I calculate simulated paths for nominal GDP and money base, using counterfactual simulation method. The results suggest that, compared to the historical monetary policy, the rule would not be able to secure a smoother path of nominal GDP and would bring only a slight improvement in the central bank´s ability to keep average inflation on its target. These results are not convincing enough to support a decision in favor of replacing the current regime of inflation targeting with nominal GDP targeting regime based on McCallum´s rule. Even so, it would be possible to use the rule under the current regime as a benchmark or a monitoring tool for assessing the stance of monetary policy.