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The Science of Monetary Policy: A New Keynesian Perspective

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  • Richard Clarida
  • Jordi Gali
  • Mark Gertler

Abstract

This paper reviews the recent literature on monetary policy rules. We exploit 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 a credible commitment 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7147.

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Date of creation: May 1999
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Publication status: published as Journal of Economic Literature, Vol. 37, no. 2 (December 1999): 1661-1707.
Handle: RePEc:nbr:nberwo:7147

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  1. Leitemo, Kai & Söderström, Ulf, 2008. "Robust Monetary Policy In The New Keynesian Framework," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 12(S1), pages 126-135, April.
  2. Damjanovic, Tatiana & Damjanovic, Vladislav & Nolan, Charles, 2008. "Unconditionally optimal monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(3), pages 491-500, April.
  3. N. Gregory Mankiw, 2006. "The Macroeconomist as Scientist and Engineer," NBER Working Papers 12349, National Bureau of Economic Research, Inc.
  4. Mahir Binici & Yin-Wong Cheung, 2011. "Exchange Rate Dynamics under Alternative Optimal Interest Rate Rules," Working Papers, Research and Monetary Policy Department, Central Bank of the Republic of Turkey 1116, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  5. Shouyong Shi, 2006. "A Microfoundation of Monetary Economics," Working Papers, University of Toronto, Department of Economics tecipa-211, University of Toronto, Department of Economics.
  6. 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.
  7. Traficante, Guido, 2013. "Monetary policy, parameter uncertainty and welfare," Journal of Macroeconomics, Elsevier, Elsevier, vol. 35(C), pages 73-80.
  8. Erceg, Christopher J. & Levin, Andrew T., 2003. "Imperfect credibility and inflation persistence," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(4), pages 915-944, May.
  9. Jensen, Christian, 2013. "The gains from short-term commitments," Journal of Macroeconomics, Elsevier, Elsevier, vol. 35(C), pages 14-23.
  10. Paez-Farrell, Juan, 2012. "Should central bankers discount the future? A note," Economics Letters, Elsevier, Elsevier, vol. 114(1), pages 20-22.
  11. Bernanke, Ben S. & Boivin, Jean, 2003. "Monetary policy in a data-rich environment," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(3), pages 525-546, April.
  12. Allen Head & Lucy Qian Liu & Guido Menzio & Randall Wright, 2011. "Sticky Prices: A New Monetarist Approach," NBER Working Papers 17520, National Bureau of Economic Research, Inc.
  13. Stefan Krause, 2003. "Optimal Monetary Policy and the Equivalency between the One-period AD-AS Model and the Forward-looking New Keynesian Model," Emory Economics, Department of Economics, Emory University (Atlanta) 0317, Department of Economics, Emory University (Atlanta).
  14. 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.
  15. 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, London School of Economics and Political Science, vol. 3, pages 16-27, December.
  16. 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.
  17. 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.
  18. Gauti B. Eggertsson, 2008. "Great Expectations and the End of the Depression," American Economic Review, American Economic Association, American Economic Association, vol. 98(4), pages 1476-1516, September.
  19. Montserrat Ferré, 2005. "Should Fiscal Authorities Co-operate in a Monetary Union with Public Deficit Targets?," Journal of Common Market Studies, Wiley Blackwell, Wiley Blackwell, vol. 43(3), pages 539-550, 09.
  20. 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.
  21. Pavel Kapinos & Michael S. Hanson, 2013. "Targets In The Taylor Rule: Inflation, Speed Limit, Or Price Level?," Contemporary Economic Policy, Western Economic Association International, Western Economic Association International, vol. 31(1), pages 176-190, 01.
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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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