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

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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.

Suggested Citation

  • Michael T. Kiley, 1998. "Monetary policy under neoclassical and New-Keynesian Phillips Curves, with an application to price level and inflation targeting," Finance and Economics Discussion Series 1998-27, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:1998-27
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    References listed on IDEAS

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    Monetary policy; Monetary theory;

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