@techreport{NBERw5947,
 title = "On the Optimality of Interest Rate Smoothing",
 author = "Sergio Rebelo and Danyang Xie",
 institution = "National Bureau of Economic Research",
 type = "Working Paper",
 series = "Working Paper Series",
 number = "5947",
 year = "1997",
 month = "February",
 URL = "http://www.nber.org/papers/w5947",
 abstract = {This paper studies some continuous-time cash-in-advance models in which interest rate smoothing is optimal.   We consider both deterministic and stochastic models.  In the stochastic case we obtain two results of independent interest: (i) we study what is, to our knowledge, the only version of the neoclassical model under uncertainty that can be solved in closed form in continuous time; and (ii) we show how to characterize the competitive equilibrium of a stochastic continuous time model that cannot be computed by solving a planning problem.  We also discuss the scope for monetary policy to improve welfare in an economy with a suboptimal real competitive equilibrium, focusing on the particular example of an economy with externalities.},
}