In recent years, a broad academic consensus has arisen around the use of rational expectations sticky-price models to capture inflation dynamics. These models are seen as providing an empirically reasonable characterization of observed inflation behavior once suitable measures of the output gap are chosen; and, moreover, are perceived to be robust to the Lucas critique in a way that earlier eco...

We study the implications of trend inflation for an economy’s long-run growth rate. To do so, we extend a New Keynesian model to allow for endogenous growth. The defining characteristic of the New Keynesian framework is that inflation and nominal price stickiness together induce relative price dispersion and thus reduce monopoly profits. When the framework is embedded in an endogenous growth mo...

This paper develops a small open economy, sticky-price model with a role for current account dynamics in the transmission of shocks. I solve the stationarity problem of incomplete markets, open economy models by adopting an overlapping-generations structure. I model nominal rigidity by assuming that firms face costs of output price inflation volatility. Markup dynamics affect labor demand and i...

Abstract This study investigates the empirical validity of the variability hypothesis in Turkey for the period of February 2005-November 2015, by using cross-sectional relative price data and by focusing on the assumptions of linearity and stability. The linearity assumption between the two variables is ensured by estimating quadratic regression equation. The assumption of stability is secur...

In many economies, commodity price volatility is one of the sources of signaling to market players. Different experiences of price shocks have led economists to reconsider price shocks. Considering the effects of monetary policy on the inflation rate, the present study investigates the impact of monetary policy shock on the price of storable food commodities. In this regard, data for 2006: 01 t...

In the United States, eradication of persistent federal deficits has won broad bipartisan support. At the same time, political pressures have mounted to strengthen the Federal Reserve's explicit concern with price stability. Proposals under consideration would require a much narrower focus on the part of Fed policymakers, and could be interpreted as targeting the price level rather than a negli...

This paper undertakes a cross-country study on the price-output gap relationship for selected industrial countries (Japan, the U.S., Germany, the U.K. and Canada). The estimation results show that the price-output gap relationship in these countries can be classified into two categories: (1) a Phillips Curve-type (in which the output gap fluctuation affects the inflation rate); and (2) a NAIRU ...

This paper shows that the optimal monetary policies recommended by New Keynesian models still imply a large amount of inflation risk. We calculate the term structure of inflation uncertainty in New Keynesian models when the monetary authority adopts the optimal policy. When the monetary policy rules are modified to include some weight on a price path, the economy achieves equilibria with substa...

A number of recent papers have explored monetary policy options, including inflation targeting and inflation forecast targeting (notably Svensson (1999a, 1999b, 2000)) and price level targeting (Wolman 2000, Batini and Yates 1999, Blinder 1999). Most papers explore “optimal” monetary policy in the context of a single model. However, a number of conclusions made in the literature depend strongly...

In this paper, stochastic simulations of the Reserve Bank of New Zealand’s new macroeconomic model, FPS, are used to examine the issue of which price index should monetary policy stabilise in a small open economy. Under the class of policy rules considered, targeting a measure of domestic inflation, which does not include the direct effects of exchange rate movements on the price of imported go...