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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

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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Bibliographic Info

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: 01 Oct 2003
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Handle: RePEc:oxf:wpaper:174

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

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References

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Citations

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Cited by:
  1. Richard Mash, 2006. "Optimising Microfoundations for Inflation Persistence," Computing in Economics and Finance 2006 457, Society for Computational Economics.
  2. Yao, Fang, 2009. "Time-dependent pricing and New Keynesian Phillips curve," Discussion Paper Series 1: Economic Studies 2009,08, Deutsche Bundesbank, Research Centre.
  3. Musy, Olivier, 2006. "Inflation persistence and the real costs of disinflation in staggered prices and partial adjustment models," Economics Letters, Elsevier, vol. 91(1), pages 50-55, April.
  4. Dixon, H. D., 2009. "A unified framework for understanding and comparing dynamic wage and price-setting models," Working papers 257, Banque de France.
  5. 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.
  6. Fang Yao, 2011. "Monetary Policy, Trend Inflation and Inflation Persistence," SFB 649 Discussion Papers SFB649DP2011-008, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  7. Fang Yao, 2009. "The Cost of Tractability and the Calvo Pricing Assumption," SFB 649 Discussion Papers SFB649DP2009-042, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

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