Lack of divine coincidence in New Keynesian models

Sergio Alves

Journal of Monetary Economics, 2014, vol. 67, issue C, 33-46

Abstract: The literature has long agreed that the divine coincidence holds in standard New Keynesian models: the monetary authority is able to simultaneously stabilize inflation and output gap in response to preference and technology shocks. I show that the divine coincidence holds only when inflation is stabilized at exactly zero. Even small deviations from zero generate policy trade-offs. I demonstrate this result using the model׳s non-linear equilibrium conditions to avoid biases from log-linearization. When the model is log-linearized, a non-zero steady state level of inflation gives rise to what I call the endogenous trend inflation cost-push shock in the New -Keynesian Phillips curve.

Keywords: Policy trade-off; Divine coincidence; Optimal policy; Trend inflation (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (23)

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Related works:
Working Paper: Is the Divine Coincidence Just a Coincidence? The Implications of Trend Inflation (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:67:y:2014:i:c:p:33-46

DOI: 10.1016/j.jmoneco.2014.07.002

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