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New Keynesian Microfoundations Revisited: A Generalised Calvo-Taylor Model and the Desirability of Inflation vs. Price Level Targeting

  • Mash, Richard

    (University of Oxford)

Optimal monetary policy is sensitive to the Phillips curve used to represent the dynamics of inflation and output. Most recent literature has used a New Keynesian Phillips curve based on Calvo pricing. This paper shows that this workhorse model is not robust to relatively minor changes in its microfoundations, in particular allowing for time varying probabilitites of a firm being able to reset its price. We derive a general model that nests Calvo and the Taylor staggering model as special cases and analyse its implications for optimal policy, including the relative desirability of inflation and price level targeting.

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Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2002 with number 138.

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Date of creation: 29 Aug 2002
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Handle: RePEc:ecj:ac2002:138
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