Policy Implications of the New Keynesian Phillips Curve
FRB Richmond Economic Quarterly, Vol. 94, No. 4, Fall 2008, pp. 435-465
31 Pages Posted: 11 Dec 2012
Date Written: 2008
This article surveys recent advancements in the theory of optimal monetary policy in models with a New Keynesian Phillips curve. It identifies four policy implications. First, near price stability is optimal. Second, simple interest rate feedback rules that respond aggressively to price inflation deliver near-optimal equilibrium allocations. Third, interest rate rules that respond to deviations of output from trend may carry significant welfare costs. Fourth, the zero bound on nominal interest rates does not appear to be a significant obstacle for the actual implementation of low and stable inflation.
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