Optimal price-level drift under commitment in the canonical New Keynesian model

Robert Amano, Steven Ambler () and Malik Shukayev ()

Canadian Journal of Economics, 2012, vol. 45, issue 3, 1023-1036

Abstract: In both the canonical and many extended versions of the New Keynesian model, optimal monetary policy under commitment implies price-level stationarity as long as expectations are rational. We show that this is no longer the case if the central bank and private agents make decisions before observing current shocks. The optimal amount of price-level drift in response to unexpected innovations to inflation is quantitatively important. This result has important implications for monetary policy, including the design of the optimal loss function for the central bank if it cannot commit to its future policies.

JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (6)

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