OUTPUT STABILIZATION AND REAL RIGIDITY*
George Bratsiotis () and
Christopher Martin ()
Manchester School, 2005, vol. 73, issue 6, 728-736
We use a simple model to show that there is a positive relationship between monetary policy preferences for output stability, real rigidity and macroeconomic persistence. This result has two non‐trivial implications. First it suggests that output stabilization may be a less desirable policy target since it generates real rigidity and macroeconomic persistence. Second, it provides a theoretical rationale as to why models in which monetary policy does not respond to output have been typically unable to replicate the persistence observed in real data.
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