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What do New-Keynesian Phillips Curves imply for price-level targeting?

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Author Info
Robert Dittmar
William T. Gavin

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Abstract

This paper extends the analysis of price-level targeting to a model including the New-Keynesian Phillips Curve. We examine the inflation-output variability tradeoffs implied by optimal inflation and price-level rules. In previous work with the Neoclassical Phillips Curve, we found that the choice between inflation targeting and price-level targeting depended on the amount of persistence in the output gap. That is, if the output gap was not too persistent, or if lagged output did not enter the aggregate supply function, then inflation targets were preferred to price-level targets. When we start with a New-Keynesian Phillips Curve, the amount of persistence in the output gap still affects the relative placement of the inflation-output variability tradeoff. But, contrary to the Neoclassical case, even where the persistence of the output gap in the aggregate supply function is small or nonexistent, the price-level- targeting regime still results in a more favorable tradeoff between output and inflation variability than does an inflation-targeting regime.

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Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2000)
Issue (Month): Mar ()
Pages: 21-30
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Handle: RePEc:fip:fedlrv:y:2000:i:mar:p:21-30:n:v.82no.2

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Keywords: Phillips curve Monetary policy Inflation (Finance)

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. John B. Taylor, 1980. "Aggregate Dynamics and Staggered Contracts," NBER Reprints 0126, National Bureau of Economic Research, Inc.
    Other versions:
  2. Woodford, Michael, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(0), pages 1-35, Supplemen. [Downloadable!] (restricted)
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  3. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December. [Downloadable!] (restricted)
    Other versions:
  4. Svensson, L-E-O, 1996. "Price Level Targeting vs Inflation Targeting : A free Lunch?," Papers 614, Stockholm - International Economic Studies.
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  5. Robert Dittmar & William T. Gavin & Finn Kydland, 1999. "The inflation-output variability tradeoff and price-level targets," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 23-32. [Downloadable!]
  6. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
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  7. King, Robert G. & Watson, Mark W., 1994. "The post-war U.S. phillips curve: a revisionist econometric history," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 157-219, December. [Downloadable!] (restricted)
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  8. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November. [Downloadable!] (restricted)
  9. Gray, Jo Anna & Spencer, David E, 1990. "Price Prediction Errors and Real Activity: A Reassessment," Economic Inquiry, Oxford University Press, vol. 28(4), pages 658-81, October.
  10. Athanasios Orphanides, 1998. "Monetary policy evaluation with noisy information," Finance and Economics Discussion Series 1998-50, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  11. 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.). [Downloadable!]
  12. Stephen G. Cecchetti & Margaret M. McConnell & Gabriel Perez Quiros, 1999. "Policymakers' revealed preferences and the output-inflation variability trade-off: implications for the European system of central banks," Proceedings, Federal Reserve Bank of San Francisco.
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  13. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February. [Downloadable!] (restricted)
  14. John C. Williams, 1999. "Simple rules for monetary policy," Finance and Economics Discussion Series 1999-12, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  15. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Manfred Gärtner, 2006. "The political economy of monetary policy conduct and central bank design," University of St. Gallen Department of Economics working paper series 2006 2006-25, Department of Economics, University of St. Gallen. [Downloadable!]
  2. Yuen Chi-Wa, 2002. "Openness And The Output-Inflation Tradeoff: Floating Vs. Fixed Exchange Rates," International Economic Journal, Korean International Economic Association, vol. 16(4), pages 1-26, December. [Downloadable!] (restricted)
  3. Daniel John Zizzo, 2004. "Positive Harmony Transformations and Equilibrium Selection in Two-Player Games," Economics Series Working Papers 197, University of Oxford, Department of Economics. [Downloadable!]
  4. Richard Mash, 2003. "New Keynesian Microfoundations Revisited: A Calvo-Taylor-Rule-of-Thumb Model and Optimal Monetary Policy Delegation," Economics Series Working Papers 174, University of Oxford, Department of Economics. [Downloadable!]
  5. James Yetman, 2003. "The credibility of the monetary policy ‘free lunch’," Working Paper Series 284, European Central Bank. [Downloadable!]
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  6. Douch, Mohamed, 2006. "Hybrid Inflation and Price Level Targeting in Small-Open-Economy," MPRA Paper 6173, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  7. Malik, Hamza, 2005. "Price Level vs. Nominal Income Targeting: Aggregate Demand Shocks and the Cost Channel of Monetary Policy Transmission," MPRA Paper 456, University Library of Munich, Germany, revised Aug 2006. [Downloadable!]
  8. Andrew Glyn, 2004. "Comparing sectoral productivity across countries," Economics Series Working Papers 195, University of Oxford, Department of Economics. [Downloadable!]
  9. Richard Mash, 2002. "New Keynesian Microfundations Revisited: A Generalised Calvo-Taylor Model and the Desirability of Inflation vs. Price Level Targeting," Economics Series Working Papers 109, University of Oxford, Department of Economics. [Downloadable!]
    Other versions:
  10. Takatoshi Ito & Frederic S. Mishkin, 2004. "Two Decades of Japanese Monetary Policy and the Deflation Problem," NBER Working Papers 10878, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Nessén, Marianne & Vestin, David, 2000. "Average Inflation Targeting," Working Paper Series 119, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
    Other versions:
  12. Stephen G. Cecchetti & Junhan Kim, 2003. "Inflation Targeting, Price-Path Targeting and Output Variability," NBER Working Papers 9672, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Manfred Gärtner, 2002. "Monetary policy and central bank behaviour," University of St. Gallen Department of Economics working paper series 2002 2002-24, Department of Economics, University of St. Gallen. [Downloadable!]
  14. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2001. "One decade of inflation targeting in the world : What do we know and what do we need to know?," Working Papers Central Bank of Chile 101, Central Bank of Chile. [Downloadable!]
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  15. Stephen G. Cecchetti & Stefan Krause, 2006. "Inflation Targeting versus Price-Path Targeting: Looking For Improvements," Working Papers Central Bank of Chile 399, Central Bank of Chile. [Downloadable!]
  16. Carl E. Walsh, 2003. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 93(1), pages 265-278, March. [Downloadable!] (restricted)
    Other versions:
  17. William T. Gavin, 2000. "Controlling inflation after Bretton Woods: an analysis based on policy objectives," Working Papers 2000-007, Federal Reserve Bank of St. Louis. [Downloadable!]
  18. Robert Dittmar & William T. Gavin & Finn E. Kydland, 1999. "Price-level uncertainty and inflation targeting," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 23-34. [Downloadable!]
  19. James Yetman, 2005. "Discretionary Policy, Potential Output Uncertainty, and Optimal Learning," Reserve Bank of New Zealand Discussion Paper Series DP2005/07, Reserve Bank of New Zealand. [Downloadable!]
  20. Gregory E. Givens, 2006. "Revisiting the Delegation Problem in a Sticky Price and Wage Economy," Working Papers 200601, Middle Tennessee State University, Department of Economics and Finance. [Downloadable!]
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