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The Science of Monetary Policy: A New Keynesian Perspective

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  • Clarida, Richard
  • Galí, Jordi
  • Gertler, Mark

Abstract

This paper reviews the recent literature on monetary policy rules. We exposit the monetary policy design problem within a simple baseline theoretical framework. We then consider the implications of adding various real world complications. Among other things, we show that the optimal policy implicitly incorporates inflation targeting. We also characterize the gains from making credible commitments to fight inflation. In contrast to conventional wisdom, we show that gains from commitment may emerge even if the central bank is not trying to inadvisedly push output above its natural level. We also consider the implications of frictions such as imperfect information.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2139.

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Date of creation: May 1999
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Handle: RePEc:cpr:ceprdp:2139

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Related research

Keywords: Credibility; Monetary Policy; New Keynesian Models; Stabilization;

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References

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  1. Teruyoshi Kobayashi, 2005. "Optimal monetary policy and the role of hybrid inflation-price-level targets," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 37(18), pages 2119-2125.
  2. Mahir Binici & Yin-Wong Cheung, 2011. "Exchange Rate Dynamics under Alternative Optimal Interest Rate Rules," CESifo Working Paper Series 3577, CESifo Group Munich.
  3. Montserrat Ferré, 2005. "Should Fiscal Authorities Co-operate in a Monetary Union with Public Deficit Targets?," Journal of Common Market Studies, Wiley Blackwell, vol. 43(3), pages 539-550, 09.
  4. Shouyong Shi, 2006. "A Microfoundation of Monetary Economics," Working Papers tecipa-211, University of Toronto, Department of Economics.
  5. Damjanovic, Tatiana & Damjanovic, Vladislav & Nolan, Charles, 2008. "Unconditionally optimal monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(3), pages 491-500, April.
  6. Allen Head & Lucy Qian Liu & Guido Menzio & Randall Wright, 2011. "Sticky prices: a new monetarist approach," Working Papers, Federal Reserve Bank of Minneapolis 690, Federal Reserve Bank of Minneapolis.
  7. Pavel Kapinos & Michael S. Hanson, 2013. "Targets In The Taylor Rule: Inflation, Speed Limit, Or Price Level?," Contemporary Economic Policy, Western Economic Association International, vol. 31(1), pages 176-190, 01.
  8. Junhan Kim, 2011. "Inflation Targeting as Constrained Discretion," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 43(7), pages 1505-1522, October.
  9. Stefan Krause, 2006. "Optimal monetary policy and the equivalency between the one-period AD-AS model and the forward-looking New Keynesian model," Applied Economics Letters, Taylor & Francis Journals, vol. 13(9), pages 541-544.
  10. Ben S. Bernanke & Jean Boivin, 2001. "Monetary Policy in a Data-Rich Environment," NBER Working Papers 8379, National Bureau of Economic Research, Inc.
  11. N. Gregory Mankiw, 2006. "The Macroeconomist as Scientist and Engineer," NBER Working Papers 12349, National Bureau of Economic Research, Inc.
  12. Bils, Mark & Chang, Yongsung, 2003. "Welfare costs of sticky wages when effort can respond," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(2), pages 311-330, March.
  13. Kai Leitemo & Ulf Soderstrom, 2004. "Robust Monetary Policy in the New-Keynesian Framework," Working Papers 273, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  14. Jensen, Christian, 2013. "The gains from short-term commitments," Journal of Macroeconomics, Elsevier, Elsevier, vol. 35(C), pages 14-23.
  15. Gauti B. Eggertsson, 2005. "Great expectations and the end of the depression," Staff Reports 234, Federal Reserve Bank of New York.
  16. Dufour, Jean-Marie & Khalaf, Lynda & Kichian, Maral, 2013. "Identification-robust analysis of DSGE and structural macroeconomic models," Journal of Monetary Economics, Elsevier, Elsevier, vol. 60(3), pages 340-350.
  17. Christopher J. Erceg and Andrew T. Levin, 2001. "Imperfect Credibility and Inflation Persistence," Computing in Economics and Finance 2001, Society for Computational Economics 19, Society for Computational Economics.
  18. Peter Tillmann, 2012. "Has Inflation Persistence Changed under EMU?," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 13(1), pages 86-102, 02.
  19. Paez-Farrell, Juan, 2012. "Should central bankers discount the future? A note," Economics Letters, Elsevier, vol. 114(1), pages 20-22.
  20. Waltraud Schelkle & Anke Hassel, 2012. "The Policy Consensus Ruling European Political Economy: The Political Attractions of Discredited Economics," Global Policy, London School of Economics and Political Science, vol. 3, pages 16-27, December.
  21. Traficante, Guido, 2013. "Monetary policy, parameter uncertainty and welfare," Journal of Macroeconomics, Elsevier, Elsevier, vol. 35(C), pages 73-80.
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Blog mentions

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  1. Manuel Arellano recibe el premio Jaime I de Economía.
    by Cives in Politikon on 2012-06-05 17:13:35
  2. Could the Shadow Open Market Committee have outperfomed the Fed?
    by Economic Logician in Economic Logic on 2011-05-10 13:51:00
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