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Optimal disinflation in new Keynesian models

  • Hagedorn, Marcus

Central bankers' conventional wisdom suggests that nominal interest rates should be raised to attain a lower inflation target. In contrast, I show that the standard New Keynesian monetary model with rational expectations and full credibility predicts that nominal interest rates should be decreased to attain this goal. Real interest rates, however, are virtually unchanged. These results also hold in recent vintages of New Keynesian models with sticky wages, price and wage indexation and habit formation in consumption.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 58 (2011)
Issue (Month): 3 ()
Pages: 248-261

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Handle: RePEc:eee:moneco:v:58:y:2011:i:3:p:248-261
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