Inflation and monetary policy in medium-sized New Keynesian DSGE models

Günter Coenen, Falk Mazelis, Roberto Motto, Annukka Ristiniemi, Frank Smets, Anders Warne and Raf Wouters

Chapter 4 in Research Handbook on Inflation, 2025, pp 62-98 from Edward Elgar Publishing

Abstract: This chapter briefly reviews the core features of the canonical New Keynesian DSGE model with a focus on the price and wage Phillips curves. We estimate the model on recent data samples for the United States and the euro area and discuss the determinants of inflation and its interaction with wages through the lens of the model. The chapter then discusses how such models have evolved in response to challenges facing the euro area such as the global financial crisis and the subsequent period of low inflation and policy rates at the effective lower bound. It then analyses how New Keynesian DSGE models are also regularly used for assessing alternative monetary policy strategies to deliver price stability and discusses some of the challenges for the canonical model that are raised by the recent high-inflation period.

Keywords: Inflation; DSGE models; Policy counterfactuals; Euro area; Optimal policy; Policy effectiveness (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035327751
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