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New Keynesian Microfoundations Revisited: A Generalised Calvo-Taylor Model and the Desirability of Inflation vs. Price Level Targeting

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  • Mash, Richard

    (University of Oxford)

Abstract

Optimal monetary policy is sensitive to the Phillips curve used to represent the dynamics of inflation and output. Most recent literature has used a New Keynesian Phillips curve based on Calvo pricing. This paper shows that this workhorse model is not robust to relatively minor changes in its microfoundations, in particular allowing for time varying probabilitites of a firm being able to reset its price. We derive a general model that nests Calvo and the Taylor staggering model as special cases and analyse its implications for optimal policy, including the relative desirability of inflation and price level targeting.

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Bibliographic Info

Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2002 with number 138.

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Date of creation: 29 Aug 2002
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Handle: RePEc:ecj:ac2002:138

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Cited by:
  1. Bakhshi Hasan & Hashmat Khan & Barbara Rudolf, 2005. "The Phillips curve under state-dependent pricing," Working Papers 2005-01, Swiss National Bank.
  2. Rudolf, B. & Bakhshi, H., 2005. "The Phillips Curve Under State-Dependent Pricing," Computing in Economics and Finance 2005 68, Society for Computational Economics.
  3. Richard Mash, 2004. "Optimising microfoundations for observed inflation persistence," Money Macro and Finance (MMF) Research Group Conference 2003 60, Money Macro and Finance Research Group.

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