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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page Monetary Policy under Neoclassical and New-Keynesian Phillips Curves, with an Application to Price Level and Inflation Targeting
Michael T. Kiley

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) | Full paper (163 KB Postscript)

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Last update: June 30, 1998