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Optimal disinflation in new Keynesian models

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  • Hagedorn, Marcus

Abstract

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.

Suggested Citation

  • Hagedorn, Marcus, 2011. "Optimal disinflation in new Keynesian models," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 248-261.
  • Handle: RePEc:eee:moneco:v:58:y:2011:i:3:p:248-261
    DOI: 10.1016/j.jmoneco.2011.05.011
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    Cited by:

    1. Cogley, Timothy & Matthes, Christian & Sbordone, Argia M., 2015. "Optimized Taylor rules for disinflation when agents are learning," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 131-147.
    2. Kamber, Gunes & McDonald, Chris & Sander, Nick & Theodoridis, Konstantinos, 2016. "Modelling the business cycle of a small open economy: The Reserve Bank of New Zealand's DSGE model," Economic Modelling, Elsevier, vol. 59(C), pages 546-569.
    3. Güneş Kamber & Chris McDonald & Nicholas Sander & Konstantinos Theodoridis, 2015. "A structural model for policy analysis and forecasting: NZSIM," Reserve Bank of New Zealand Discussion Paper Series DP2015/05, Reserve Bank of New Zealand.

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