The New Keynesian Approach to Monetary Policy Analysis: Lessons and New Directions
18 Pages Posted: 19 Mar 2008
Date Written: February 6, 2008
I discuss several lessons regarding the design and conduct of monetary policy that have emerged out of the New Keynesian research program. Those lessons include the benefits of price stability, the gains from commitment about future policies, the importance of natural variables as benchmarks for policy, and the benefits of a credible anti-inflationary stance. I also point to one challenge facing NK modelling efforts: the need to come up with relevant sources of policy tradeoffs. A potentially useful approach to meeting that challenge, based on the introduction of real imperfections, is presented.
Keywords: Sticky prices, optimal policy, interest rate rules, policy tradeoffs, credibility, gains from commitment
JEL Classification: E52
Suggested Citation: Suggested Citation