Optimal Monetary Policy with a Convex Phillips Curve

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Optimal Monetary Policy with a Convex Phillips Curve

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Tambakis, D.N.

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Demosthenes N. Tambakis

Abstract

This paper shows that convexity of the short-run Phillips curve is a source of positive inflation bias even when policymakers target the natural unemployment rate, that is when they operate with prudent discretion, and their loss function is symmetric. Optimal monetary policy also induces positive co-movement between average inflation, average unemployment and inflation variability–suggesting a new motive for inflation stabilization policy–and positively skewed unemployment distributions. The reduced form model is applied to the post-disinflation period (1986-2006) in developed countries and its properties are illustrated numerically for the United States.

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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0859.

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Date of creation: Dec 2008
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Handle: RePEc:cam:camdae:0859

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Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

This paper has been announced in the following NEP Reports:

NEP-ALL-2009-02-07 (All new papers)
NEP-CBA-2009-02-07 (Central Banking)
NEP-MAC-2009-02-07 (Macroeconomics)
NEP-MON-2009-02-07 (Monetary Economics)

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