The Slope of the Phillips Curve and the Mandate of the Central Bank

Gregory Phelan, Jean-Paul L'Huillier and William Zame

No 2025_105, Department of Economics Working Papers from Department of Economics, Williams College

Abstract: "Under exogenous price stickiness, the divine coincidence suggests that the Central Bank can focus on inflation stabilization to maximize welfare. We show that endogenous price stickiness upsets this result. The pursuit of price stability may, in fact, increase price stickiness, flatten the Phillips curve, increase the distortions due to sticky prices, and lead to a welfare loss. Welfare can be improved if the Central Bank stabilizes the output gap directly (dual mandate). Our argument does not rely on markup shocks or nominal wage rigidities. Instead, the key to these insights is the consideration of a strategic microfoundation for price stickiness."

Keywords: Central bank design; policy-dependent price stickiness; Lucas critique (search for similar items in EconPapers)
JEL-codes: E52 (search for similar items in EconPapers)
Pages: 70
Date: 2025-02-10
New Economics Papers: this item is included in nep-cba and nep-mon
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