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An Evaluation of Alternative Monetary Policy Rules in a Model with Capacity Constraints

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Author Info

  • Clark, Peter
  • Laxton, Douglas
  • Rose, David

Abstract

A small model of the U.S. output-inflation nexus is used to examine the implications of two policy rules, one where the interest rate responds to contemporaneous inflation and one where the response is to predict future inflation. The model is asymmetric in that positive deviations of aggregate demand from potential are more inflationary than negative deviations are disinflationary. With asymmetry, following a myopic rule and allowing the economy to overheat requires deep or protracted recessions to control inflation, whereas following a forward-looking rule not only reduces volatility but also raises the equilibrium level of output.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 33 (2001)
Issue (Month): 1 (February)
Pages: 42-64

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Handle: RePEc:mcb:jmoncb:v:33:y:2001:i:1:p:42-64

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Heiner Mikosch, 2012. "Sticky Prices, Competition and the Phillips Curve," KOF Working papers 11-294, KOF Swiss Economic Institute, ETH Zurich.
  2. Agénor, Pierre-Richard & Bayraktar, Nihal, 2010. "Contracting models of the Phillips curve empirical estimates for middle-income countries," Journal of Macroeconomics, Elsevier, vol. 32(2), pages 555-570, June.
  3. Max Gillman & Mark N Harris & Michal Kejak, 2007. "The Interaction of Inflation and Financial Development with Endogenous Growth," Money Macro and Finance (MMF) Research Group Conference 2006 29, Money Macro and Finance Research Group.
  4. Lawrence J. Christiano & Christopher J. Gust, 1999. "Taylor rules in a limited participation model," Working Paper 9902, Federal Reserve Bank of Cleveland.
  5. Sarah Marit Lein & Eva Köberl, 2009. "Capacity Utilisation, Constraintes and Price Adjustments under the Microscope," Working Papers 2009-06, Swiss National Bank.
  6. Livio Stracca & Ali Al-Nowaihi, 2002. "Non-standard Central Bank loss functions; skewed risks; and certainty equivalence," Working Paper Series 129, European Central Bank.
  7. Silvia Sgherri & Tamim Bayoumi, 2004. "Monetary Magic? How the Fed Improved the Supply Side of the Economy," Econometric Society 2004 Australasian Meetings 20, Econometric Society.
  8. Alvarez-Lois, Pedro P., 2004. "Capacity constraints, idiosyncratic demand uncertainty and the dynamics of inflation," Economics Letters, Elsevier, vol. 83(1), pages 15-21, April.
  9. Norman Loayza & Klaus Schmidt-Hebbel, 2002. "Monetary Policy Functions and Transmission Mechanisms: An Overview," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 1, pages 001-020 Central Bank of Chile.
  10. Tamim Bayoumi & Silvia Sgherri, 2004. "Monetary Magic? How the Fed Improved the Flexibility of the U.S. Economy," IMF Working Papers 04/24, International Monetary Fund.

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