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Optimal Monetary Policy with a Convex Phillips Curve

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  • Tambakis, D.N.

Abstract

This paper shows that convexity of the short-run Phillips curve is a source of positive inflation bias even when policymakers target the natural unemployment rate, that is when they operate with prudent discretion, and their loss function is symmetric. Optimal monetary policy also induces positive co-movement between average inflation, average unemployment and inflation variability–suggesting a new motive for inflation stabilization policy–and positively skewed unemployment distributions. The reduced form model is applied to the post-disinflation period (1986-2006) in developed countries and its properties are illustrated numerically for the United States.

Suggested Citation

  • Tambakis, D.N., 2008. "Optimal Monetary Policy with a Convex Phillips Curve," Cambridge Working Papers in Economics 0859, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:0859
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    References listed on IDEAS

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    Cited by:

    1. Kumar, Anil & M. Orrenius, Pia, 2016. "A closer look at the Phillips curve using state-level data," Journal of Macroeconomics, Elsevier, vol. 47(PA), pages 84-102.
    2. Semmler, Willi & Gross, Marco, 2017. "Mind the output gap: the disconnect of growth and inflation during recessions and convex Phillips curves in the euro area," Working Paper Series 2004, European Central Bank.

    More about this item

    Keywords

    Monetary policy; inflation bias; inflation variability; prudent discretion.;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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