MIGUEL CASARES Monetary Policy Rules in a New Keynesian Euro Area Model The first part of this paper is devoted to describe a New Keynesian model, which, after calibration, shows a great fit on Euro area macroeconomic data. Then, the stabilizing properties of alternative monetary policy rules are eval- uated for consideration of the European Central Bank (ECB). Our main find- ing is that a simple rule that provides the reaction of the nominal interest rate to price inflation, wage inflation, and its previous observation can fairly well approximate the optimal monetary policy. This result is robust to including an ECB preference on interest-rate smoothing. JEL codes: E0, E4, E5 Keywords: instrument rules, targeting rules, Euro area. MONETARY POLICY RULES can be classified into targeting rules and instrument rules as proposed by Lars Svensson (see Svensson 1999, 2002). Tar- geting rules are designed by solving a central bank’s optimizing program that defines an objective (loss) function and considers a single model describing the economy. Targeting rules are thus model dependent. Typical policy targets in the central bank objective function are variability of inflation, the output gap, or the nominal interest rate. An implicit reaction function, a monetary policy rule, might be written as the optimal response of the policy instrument (usually the nominal interest rate) to the state variables. Two influential papers on targeting rules are Clarida, Gal´ ı, and Gertler (1999) and Svensson (1999). The first version of this paper was written while the author took part in the “Convocatoria para la real- izaci´ on de trabajos sobre econom´ ıa en el Banco de Espa ˜ na, 2003–2004.” The author thanks Javier Vall´ es, Javier Andr´ es, Jordi Gal´ ı, David L´ opez-Salido, ´ Oscar Bajo-Rubio, and Bennett T. McCallum for helpful comments and suggestions, and both Banco de Espa˜ na and Ministerio de Educaci´ on y Ciencia (research projects 2002/00954 and SEJ2005-03470/ECON) for their financial support. The opinions expressed in this paper are exclusively of the author and do not necessarily reflect those of Banco de Espa ˜ na. MIGUEL CASARES is in the Departamento de Econom´ ıa, Universidad P´ ublica de Navarra, Pamplona, Spain (E-mail: mcasares@unavarra.es). Received August 8, 2005; and accepted in revised form January 23, 2006. Journal of Money, Credit and Banking, Vol. 39, No. 4 (June 2007) C  2007 The Ohio State University