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Effective Monetary Policy Strategies in New Keynesian Models: A Reexamination

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  • Hess Chung
  • Edward Herbst
  • Michael T. Kiley

Abstract

We explore the importance of the nature of nominal price and wage adjustment for the design of effective monetary policy strategies, especially at the zero lower bound. Our analysis suggests that sticky-price and sticky-information models fit standard macroeconomic time series comparably well. However, the model with information rigidity responds differently to anticipated shocks and persistent zero-lower bound episodes - to a degree important for monetary policy and for understanding the effects of fundamental disturbances when monetary policy cannot adjust. These differences may be important for understanding other policy issues as well, such as fiscal multipliers. Despite these differences, many aspects of effective policy strategy are common across the two models: In particular, highly inertial interest rate rules that respond to nominal income or the price level perform well, even when hit by adverse supply shocks or large demand shocks that induce the zero-lower bound. Rules that respond to the level or change in the output gap can perform poorly under those conditions.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

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  • Hess Chung & Edward Herbst & Michael T. Kiley, 2015. "Effective Monetary Policy Strategies in New Keynesian Models: A Reexamination," NBER Macroeconomics Annual, University of Chicago Press, vol. 29(1), pages 289-344.
  • Handle: RePEc:ucp:macann:doi:10.1086/680629
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    1. The Phillips Curve and Inflation
      by thebusinesscycleblog in The business cycle blog on 2016-05-21 23:08:29

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    1. repec:eee:jmacro:v:54:y:2017:i:pb:p:232-259 is not listed on IDEAS
    2. Michael Kiley, 2016. "Policy Paradoxes in the New-Keynesian Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 1-15, July.
    3. Kiley, Michael T. & Sim, Jae, 2017. "Optimal monetary and macroprudential policies: Gains and pitfalls in a model of financial intermediation," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 232-259.
    4. Lars E. O. Svensson, 2014. "Comment on "Effective Monetary Policy Strategies in New Keynesian Models: A Reexamination"," NBER Chapters,in: NBER Macroeconomics Annual 2014, Volume 29, pages 345-353 National Bureau of Economic Research, Inc.
    5. Hess Chung & Edward Herbst & Michael T. Kiley, 2015. "Effective Monetary Policy Strategies in New Keynesian Models: A Reexamination," NBER Macroeconomics Annual, University of Chicago Press, vol. 29(1), pages 289-344.
    6. Michael T. Kiley & John M. Roberts, 2017. "Monetary Policy in a Low Interest Rate World," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(1 (Spring), pages 317-396.
    7. George-Marios Angeletos, 2017. "Frictional Coordination," NBER Working Papers 24178, National Bureau of Economic Research, Inc.
    8. Adam, Felix & Matthes, Jürgen, 2018. "Zur Belastbarkeit von Forderungen nach expansiver Fiskalpolitik an der Nullzinsgrenze: Eine Kritik neukeynesianischer Modelle auf Basis einer Literaturanalyse," IW-Reports 7/2018, Institut der deutschen Wirtschaft Köln (IW) / Cologne Institute for Economic Research.
    9. Timothy S. Hills & Taisuke Nakata & Sebastian Schmidt, 2016. "The Risk of Returning to the Effective Lower Bound : An Implication for Inflation Dynamics After Lift-Off," FEDS Notes 2016-02-12-2, Board of Governors of the Federal Reserve System (U.S.).
    10. Christian Bredemeier & Christoph Kaufmann & Andreas Schabert, 2017. "Interest Rate Spreads and Forward Guidance," Working Paper Series in Economics 96, University of Cologne, Department of Economics.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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