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Policy implications of the New Keynesian Phillips curve

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  • Stephanie Schmitt-Grohe
  • Martin Uribe

Abstract

This article surveys recent advancements in the theory of optimal monetary policy in models with a New Keynesian Phillips curve. It identifies four policy implications. First, near price stability is optimal. Second, simple interest rate feedback rules that respond aggressively to price inflation deliver near-optimal equilibrium allocations. Third, interest rate rules that respond to deviations of output from trend may carry significant welfare costs. Fourth, the zero bound on nominal interest rates does not appear to be a significant obstacle for the actual implementation of low and stable inflation.

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  • Stephanie Schmitt-Grohe & Martin Uribe, 2008. "Policy implications of the New Keynesian Phillips curve," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 94(Fall), pages 435-465.
    • Handle: RePEc:fip:fedreq:y:2008:i:fall:p:435-465:n:v.94no.4
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    Cited by:

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    2. Daniela Milučká, 2014. "Inflation dynamics in the Czech Republic: Estimation of the New Keynesian Phillips curve," International Journal of Economic Sciences, Prague University of Economics and Business, vol. 2014(2), pages 53-70.
    3. Fagan, Gabriel & Messina, Julián, 2009. "Downward wage rigidity and optimal steady-state inflation," Working Paper Series 1048, European Central Bank.
    4. Junjie Guo & Juan Carlos Escanciano & Jinho Choi, 2017. "Identification and Generalized Band Spectrum Estimation of the New Keynesian Phillips Curve," CAEPR Working Papers 2017-014, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.

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    Inflation (Finance); Phillips curve;

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