Working Paper

What do New-Keynesian Phillips Curves imply for price level targeting?

Abstract: This paper extends the analysis of price level targeting to a model including the New-Keynesian Phillips Curve. We examine the inflation-output variability tradeoffs implied by optimal inflation and price level rules. In previous work with the Neoclassical Phillips Curve, we found that the choice between inflation targeting and price level targeting depended on the amount of persistence in the output gap. That is, if the output gap was not too persistent, or if lagged output did not enter the aggregate supply function, then inflation targets were preferred to price level targets. When we start with a New Keynesian Phillips Curve, the amount of persistence in the output gap still affects the relative placement of the inflation-output variability tradeoff. But, contrary to the Neoclassical case, even where the persistence of the output gap in the aggregate supply function is small or nonexistent, the price level targeting regime still results in a more favorable tradeoff between output and inflation variability than does an inflation-targeting regime.

Keywords: Phillips curve; Monetary policy; Inflation (Finance);

Status: Published in Federal Reserve Bank of St. Louis Review, March/April 2000, 82(2), pp. 21-30

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 1999

Number: 1999-021