Monetary Policy and Inflation

 Monetary Plan and Pumpiing Essay

Pumpiing Targets, Credibility, and Determination

In a Straightforward Sticky-Price Framework

Jeremy Rudd

Federal Hold Board

Karl Whelan

Central Bank of eire

July 3, 2003


This paper presents a re-formulated version of a canonical sticky-price unit that has been extended to are the cause of variations after some time in the central bank's inflation tar- get. We derive a closed-form solution for the style, and analyze its homes under different parameter values. The version is used to learn topics in relation to the at the ects of disinflationary economic policies and inflation determination. In particular, we employ the model to illustrate and assess the critique that common sticky-price versions generate counterfactual predictions intended for the elizabeth ects of monetary coverage. Corresponding author. Mailing talk about: Mail Quit 80, twentieth and C Streets NW, Washington, POWER 20551. Email: jeremy. w. [email protected] gov.

E-mail: karl. [email protected] ie. We say thanks to Gregory Mankiw and Olivier Blanchard pertaining to useful dis- cussions upon several of the topics regarded as here. The views indicated in this newspaper are our own, and do not always reflect the views in the Board of Governors, the sta in the Federal Hold System, or the Central Traditional bank of Ireland.

one particular Introduction

A crucial trend in macroeconomic analysis in recent years involves the elevated use of optimization-based sticky-price versions to analyze just how monetary coverage a ects the econ- omy and how optimal insurance plan should be designed. Much of this analysis utilizes a simple base model that features a \new-Keynesian" Phillips curve to characterize inflation, an \expectational CAN BE curve" to determine output expansion, and a policy rule that describes how a central bank sets initial interest rates; agent examples of studies that use this framework consist of Clarida, Woman, and Gertler (1999), McCallum (2001), and Wood- kia (2003).

A single limitation of existing operate this area is the fact applications of the baseline style have commonly been restricted to contexts in which the central traditional bank maintains a xed infla- tion target, with particular interest being paid to the elizabeth ects from the type of monetary policy \shock" that is usually analyzed in the empirical VA literature (namely, a temporary de- viation by a stable insurance plan rule). Through this paper, we all present a re-formulated edition of the baseline sticky-price unit that has been prolonged to account for variations after some time in the central bank's inflation target. All of us derive a completely specied closed-form solution pertaining to the model in which result and pumpiing are related both to policy shock absorbers (as usually dened) and expected future changes in the pumpiing target. The model supplies a simple but flexible framework for understanding a number of problems that have recently been dealt with using a selection of di erent specications. Especially, the unit sheds mild on several important existing critiques about the general capability of sticky-price models for capturing the electronic ects of disinflationary financial policies.

The type of critique that we consider comes from Laurence Ball's (1994) famous ex- ample of a sticky-price economy in which an story of a steady reduction in the speed of regarding the money source results in a boom in output. This has commonly been seen as a significant counterfactual conjecture of these versions in light with the large seen costs of disinflation; in addition, Ball's consequence appears in odds with all the position of Woodford (2003) and others the particular models properly capture the e ect of a monetary tightening in output. We use the framework to demonstrate how these apparently con- tradictory benefits can be reconciled by observing that they reveal the e ects of two dalam erent types of shocks in our model. Specically, in the more general framework that people derive below, Ball's example of a steady disinflation that is achieved through a deceleration in the money supply is equivalent to the where the central bank's goal...

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