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Phillips Curve Instability and Optimal Monetary Policy

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  • TROY DAVIG

Abstract

Empirical evidence suggests the Phillips curve has flattened over the past few decades. To capture this feature of the data, I develop a framework where firms face a changing cost of price adjustment, which produces a Phillips curve with a slope coefficient that varies over time. To evaluate the implications for monetary policy, I construct the utility‐based welfare criterion where the relative weight on output gap deviations changes synchronously with the slope of the Phillips curve. The systematic component of the rule that implements optimal policy is constant under discretion and commitment.

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  • Troy Davig, 2016. "Phillips Curve Instability and Optimal Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(1), pages 233-246, February.
  • Handle: RePEc:wly:jmoncb:v:48:y:2016:i:1:p:233-246
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    File URL: http://hdl.handle.net/10.1111/jmcb.12296
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    References listed on IDEAS

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    1. John M. Roberts, 2006. "Monetary Policy and Inflation Dynamics," International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
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    15. Troy Davig & Eric M. Leeper, 2007. "Fluctuating Macro Policies and the Fiscal Theory," NBER Chapters,in: NBER Macroeconomics Annual 2006, Volume 21, pages 247-316 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Troy Davig & Eric M. Leeper, 2010. "Generalizing the Taylor Principle: Reply," American Economic Review, American Economic Association, vol. 100(1), pages 618-624, March.
    2. Troy Davig & Eric Leeper, 2009. "Reply To “Generalizing The Taylor Principle: A Comment”," CAEPR Working Papers 2009-008, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    3. Foerster, Andrew T. & Choi, Jason, 2016. "Optimal monetary policy regime switches," Research Working Paper RWP 16-7, Federal Reserve Bank of Kansas City.
    4. Jisheng Yang, 2010. "Expectation, excess liquidity and inflation dynamics in China," Frontiers of Economics in China, Springer;Higher Education Press, vol. 5(3), pages 412-429, September.
    5. Marian Vavra, 2013. "Testing for linear and Markov switching DSGE models," Working and Discussion Papers WP 3/2013, Research Department, National Bank of Slovakia.
    6. Seonghoon Cho, 2016. "Sufficient Conditions for Determinacy in a Class of Markov-Switching Rational Expectations Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 182-200, July.
    7. repec:eee:jmacro:v:57:y:2018:i:c:p:367-379 is not listed on IDEAS
    8. repec:spr:izalpo:v:6:y:2017:i:1:d:10.1186_s40173-017-0087-z is not listed on IDEAS
    9. Guido Bulligan & Eliana Viviano, 2017. "Has the wage Phillips curve changed in the euro area?," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 6(1), pages 1-22, December.

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