Paper #1039

Title:

Macroeconomic modeling for monetary policy evaluation

Authors:

Jordi Galí and Mark Gertler

Date:

June 2007 (Revised: July 2007)

Abstract:

We describe some of the main features of the recent vintage macroeconomic models used for monetary policy evaluation. We point to some of the key differences with respect to the earlier generation of macro models, and highlight the insights for policy that these new frameworks have to offer. Our discussion emphasizes two key aspects of the new models: the significant role of expectations of future policy actions in the monetary transmission mechanism, and the importance for the central bank of tracking of the flexible price equilibrium values of the natural levels of output and the real interest rate. We argue that both features have important implications for the conduct of monetary policy.

Keywords:

New Keynesian models, microeconomic foundations, nominal rigidities, interest rate rules

JEL codes:

E32

Area of Research:

Macroeconomics and International Economics

Published in:

Journal of Economic Perspectives, Vol. 21 (4), 2007 25-45

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