Monetary policy under neoclassical and New-Keynesian Phillips Curves, with an application to price level and inflation targeting

No 1998-27, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper compares discretionary monetary policy under two Phillips curves. Previous work uses a Phillips curve consistent with \"Neoclassical\" models of price adjustment. Sticky price models imply a \"New-Keynesian\" Phillips curve based on staggered price setting that delivers familiar results on an inflationary bias and inflation contracts. However, the comparison of price level and inflation targeting reveals an output/price stability tradeoff under the New-Keynesian model that does not arise under the Neoclassical specification, illustrating the usefulness of considering the New-Keynesian model. Given the empirical support for the New-Keynesian specification, a stability tradeoff likely exists.

Keywords: Monetary policy; Monetary theory (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (35)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:1998-27

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