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The Phillips Curve and Optimal Policy in a Structural Signal Extraction Model

  • Jean-Pascal Benassy


We study a monetary economy subject to "signal extraction" problems, and investigate within that framework the positive and normative aspects of monetary policy. As in Lucas (1972, 1973), imperfect signal perception generates macroeconomic correlations similar to those found in the "Phillips curve" literature. Moving to normative aspects, we find that, when aggregate shocks are present, traditional nonactivist policies do not allow to reach the first best, and that an intelligent activist policy always leads to better outcomes. The specific characteristics and effectiveness of this optimal policy also depend crucially on the problem of signal extraction. (Copyright: Elsevier)

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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 4 (2001)
Issue (Month): 1 (January)
Pages: 58-74

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Handle: RePEc:red:issued:v:4:y:2001:i:1:p:58-74
Contact details of provider: Postal: Marina Azzimonti, Department of Economics, Stonybrook University, 10 Nicolls Road, Stonybrook NY 11790 USA
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  1. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
  2. Sargent, Thomas J & Wallace, Neil, 1982. "The Real-Bills Doctrine versus the Quantity Theory: A Reconsideration," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1212-36, December.
  3. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  4. Polemarchakis, H. M. & Weiss, L., 1977. "On the desirability of a "totally random" monetary policy," Journal of Economic Theory, Elsevier, vol. 15(2), pages 345-350, August.
  5. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  6. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
  7. Bulow, J & Polemarchakis, H M, 1983. "Retroactive Money," Economica, London School of Economics and Political Science, vol. 50(199), pages 301-10, August.
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