Abstract:  This paper compares discretionary monetary policy under two Phillips
curves.
Previous work uses a Phillips curve consistent with
"Neoclassical" models of price
adjustment. Sticky price models imply a "New-Keynesian" Phillips
curve based on
staggered price setting that delivers familiar results on an
inflationary bias and
inflation contracts. However, the comparison of price level and
inflation targeting
reveals an output/price stability tradeoff under the New-Keynesian model
that does not
arise under the Neoclassical specification, illustrating the usefulness
of considering the
New-Keynesian model. Given the empirical support for the New-Keynesian
specification, a stability tradeoff likely exists.
Keywords: Time-inconsistency, rules, base drift
Full paper (67 KB PDF)
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