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New Keynesian Microfoundations Revisited: A Calvo-Taylor-Rule-of-Thumb Model and Optimal Monetary Policy Delegation

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Richard Mash

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Abstract

We analyze the microfoundations of the Phillips curve and the close links between that relationship and results concerning optimal monetary policy, stabilisation bias and monetary policy delegation. Most recent literature has used a New Keynesian Phillips Curve based on Calvo pricing, often with an additional lagged inflation term motivated by rule-of-thumb behaviour. We develop a framework which encompasses this workhorse model while allowing for a richer time dependent pricing rule. This permits a more general analysis while showing that the standard model and policy conclusions derived from it are not robust to relatively minor changes in its microfoundations.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 174.

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Date of creation: 2003
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Handle: RePEc:oxf:wpaper:174

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Related research
Keywords: monetary policy; New Keynesian Phillips Curve; Calvo pricing; rule of thumb; stabilisation bias; Monetary Policy Delegation;

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Find related papers by JEL classification:
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
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Richard Mash, 2004. "Optimising Microfoundations for Inflation Persistence," Economics Series Working Papers 183, University of Oxford, Department of Economics. [Downloadable!]
    Other versions:
  2. Dixon, Huw, 2009. "A unified framework for understanding and comparing dynamic wage and price setting models," Cardiff Economics Working Papers E2009/20, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]
  3. Richard Mash, 2003. "A Note on Simple MSV Solution Methods for Rational Expectations Models of Monetary Policy," Economics Series Working Papers 173, University of Oxford, Department of Economics. [Downloadable!]
  4. Yao, Fang, 2009. "Time-dependent pricing and New Keynesian Phillips curve," Discussion Paper Series 1: Economic Studies 2009,08, Deutsche Bundesbank, Research Centre. [Downloadable!]
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