Optimal Time-Consistent Monetary Policy in a Phillips Curve World

Thomas Cooley () and Vincenzo Quadrini ()

Working Papers from New York University, Leonard N. Stern School of Business, Department of Economics

Abstract: In this paper we study the optimal and time-consistent policy in a model economy that integrates the modern theory of unemployment with a liquidity model of monetary transmission. When the economy is subject to aggregate productivity shocks the optimal monetary policy is pro-cyclical---it increases the growth rate of money after a positive productivity shock and decreases the growth rate of money after a negative technology shock---and the model generates the Phillips Curve feature of a positive correlation between inflation and employment. We also study the long-run properties of the optimal policy under full commitment and compare it to the time-consistent policy. We show that, under some conditions, the optimal policy with commitment induces a long-run inflation rate that is higher than the long-run inflation rate in absence of policy commitment (time-consistent policy). This is in contrast to many studies that have argued that the inability of the monetary authority to commit induces a higher inflation rate.

Date: 1999
View list of references View citations in EconPapers

Downloads: (external link)
http://www.stern.nyu.edu/eco/wkpapers/workingpapers99/99-15Cooley.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:ste:nystbu:99-15

Access Statistics for this paper

More papers in Working Papers from New York University, Leonard N. Stern School of Business, Department of Economics
Address: New York University, Leonard N. Stern School of Business, Department of Economics, 44 West 4th Street, New York, NY 10012-1126
Contact information at EDIRC.
Series data maintained by Cecilia H. Aiello ().