This chapter, titled "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," by Julio Rotemberg and Michael Woodford, develops a small, structural econometric model to evaluate proposed rules for monetary policy. The authors argue that their approach, which derives from an explicit model of intertemporal optimization by both suppliers and purchasers, addresses the Lucas critique and allows for welfare analysis. The model is estimated using a vector autoregression (VAR) of interest rates, inflation, and output, and the parameters are then used to simulate the effects of hypothetical monetary policy rules. The chapter outlines five steps: estimating the VAR, postulating a theoretical model, combining the structural model with the VAR, simulating the consequences of hypothetical rules, and computing welfare consequences. The authors also develop a simple equilibrium macroeconomic model to interpret the time series data and derive the model's IS and LM equations. The model includes decision lags in price setting, which explain the delayed responses of inflation and output to monetary shocks. The chapter concludes with an estimation of the model parameters, focusing on the monetary policy rule and the stochastic processes for real disturbances.This chapter, titled "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," by Julio Rotemberg and Michael Woodford, develops a small, structural econometric model to evaluate proposed rules for monetary policy. The authors argue that their approach, which derives from an explicit model of intertemporal optimization by both suppliers and purchasers, addresses the Lucas critique and allows for welfare analysis. The model is estimated using a vector autoregression (VAR) of interest rates, inflation, and output, and the parameters are then used to simulate the effects of hypothetical monetary policy rules. The chapter outlines five steps: estimating the VAR, postulating a theoretical model, combining the structural model with the VAR, simulating the consequences of hypothetical rules, and computing welfare consequences. The authors also develop a simple equilibrium macroeconomic model to interpret the time series data and derive the model's IS and LM equations. The model includes decision lags in price setting, which explain the delayed responses of inflation and output to monetary shocks. The chapter concludes with an estimation of the model parameters, focusing on the monetary policy rule and the stochastic processes for real disturbances.