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Policy implications of the New Keynesian Phillips curve

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  • Stephanie Schmitt-Grohé
  • Martín Uribe

Abstract

This article surveys recent advancements in the theory of optimal monetary policy in models with a New Keynesian Phillips curve. It identifies four policy implications. First, near price stability is optimal. Second, simple interest rate feedback rules that respond aggressively to price inflation deliver near-optimal equilibrium allocations. Third, interest rate rules that respond to deviations of output from trend may carry significant welfare costs. Fourth, the zero bound on nominal interest rates does not appear to be a significant obstacle for the actual implementation of low and stable inflation.

Suggested Citation

  • Stephanie Schmitt-Grohé & Martín Uribe, 2008. "Policy implications of the New Keynesian Phillips curve," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 435-465.
  • Handle: RePEc:fip:fedreq:y:2008:i:fall:p:435-465:n:v.94no.4
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    File URL: http://www.richmondfed.org/publications/research/economic_quarterly/2008/fall/pdf/grohe_uribe.pdf
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    References listed on IDEAS

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    Cited by:

    1. Bilbiie, Florin O. & Fujiwara, Ippei & Ghironi, Fabio, 2014. "Optimal monetary policy with endogenous entry and product variety," Journal of Monetary Economics, Elsevier, vol. 64(C), pages 1-20.
    2. Daniela Milučká, 2014. "Inflation dynamics in the Czech Republic: Estimation of the New Keynesian Phillips curve," International Journal of Economic Sciences, University of Economics, Prague, vol. 2014(2), pages 53-70.

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    Keywords

    Inflation (Finance) ; Phillips curve;

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