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Strike while the Iron is Hot: Optimal Monetary Policy with a Nonlinear Phillips Curve

Author

Listed:
  • Peter Karadi

    (EUROPEAN CENTRAL BANK AND CEPR)

  • Anton Nakov

    (EUROPEAN CENTRAL BANK AND CEPR)

  • Galo Nuño

    (BANCO DE ESPAÑA AND CEPR)

  • Ernesto Pastén

    (CENTRAL BANK OF CHILE)

  • Dominik Thaler

    (EUROPEAN CENTRAL BANK)

Abstract

We study the Ramsey optimal monetary policy within the Golosov and Lucas (2007) state-dependent pricing framework. The model provides micro-foundations for a nonlinear Phillips curve: the sensitivity of inflation to activity increases after large shocks due to an endogenous rise in the frequency of price changes, as observed during the recent inflation surge. In response to large cost-push shocks, optimal policy leverages the lower sacrifice ratio to reduce inflation and stabilize the frequency of price adjustments. When facing total factor productivity shocks, an efficient disturbance, the optimal policy commits to strict price stability, similar to the prescription in the standard Calvo (1983) model.

Suggested Citation

  • Peter Karadi & Anton Nakov & Galo Nuño & Ernesto Pastén & Dominik Thaler, 2025. "Strike while the Iron is Hot: Optimal Monetary Policy with a Nonlinear Phillips Curve," Working Papers 2510, Banco de España.
    • Handle: RePEc:bde:wpaper:2510
    DOI: https://doi.org/10.53479/38958
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    Cited by:

    1. Hess T. Chung & Callum J. Jones & Antoine Lepetit & Fernando M. Martin, 2025. "Implications of Inflation Dynamics for Monetary Policy Strategies," Finance and Economics Discussion Series 2025-072, Board of Governors of the Federal Reserve System (U.S.).
    2. Hashmat Khan & Sergio Lago Alves, 2025. "Are New Keynesian Models Useful When Trend Inflation is Not Very Low?," Carleton Economic Papers 25-01, Carleton University, Department of Economics.
    3. Andrejs Zlobins, 2025. "Monetary Policy Transmission in the Euro Area: Is this Time Different? Chapter I: Lags and Strength," Working Papers 2025/01, Latvijas Banka.
    4. Hugh Montag & Daniel Villar Vallenas, 2025. "Post-Pandemic Price Flexibility in the U.S.: Evidence and Implications for Price Setting Models," Finance and Economics Discussion Series 2025-024, Board of Governors of the Federal Reserve System (U.S.).
    5. Mishel Ghassibe & Anton Nakov, 2025. "Business Cycles with Pricing Cascades," Working Papers 1525, Barcelona School of Economics.
    6. Cameron Haas & Mateo Hoyos & Emiliano Libman & Guilherme K. Martins & Arslan Razmi, 2025. "Monetary Shocks and Inflation: Global Evidence from Trilemma-Based Identification," Working Papers DTE 650, CIDE, División de Economía.
    7. Pablo Cuba-Borda & Jean-Paul L'Huillier, 2025. "Inflation is a Supply Phenomenon," Working Papers 137, Brandeis University, Department of Economics and International Business School.
    8. Gregory Phelan & Thomas Kohler & Jean-Paul L'Huillier & Maximilian Weiss, 2025. "Why Do Supply Disruptions Lead to Inflation?," Department of Economics Working Papers 2025-104, Department of Economics, Williams College.
    9. Bobeica, Elena & Holton, Sarah & Huber, Florian & Martínez Hernández, Catalina, 2025. "Beware of large shocks! A non-parametric structural inflation model," Working Paper Series 3052, European Central Bank.
    10. Karadi, Peter & Nakov, Anton & Nuño, Galo & Pasten, Ernesto & Thaler, Dominik, 2025. "Why monetary policy should crack down harder during high inflation," Research Bulletin, European Central Bank, vol. 130.

    More about this item

    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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