DP2139 The Science of Monetary Policy: A New Keynesian Perspective

Author(s): Richard Clarida, Jordi Galí, Mark Gertler
Publication Date: May 1999
Keyword(s): Credibility, Monetary Policy, New Keynesian Models, Stabilization
JEL(s): E0, E5
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2139

This paper reviews the recent literature on monetary policy rules. We exposit the monetary policy design problem within a simple baseline theoretical framework. We then consider the implications of adding various real world complications. Among other things, we show that the optimal policy implicitly incorporates inflation targeting. We also characterize the gains from making credible commitments to fight inflation. In contrast to conventional wisdom, we show that gains from commitment may emerge even if the central bank is not trying to inadvisedly push output above its natural level. We also consider the implications of frictions such as imperfect information.