Paper #1075

Title:

The new Keynesian approach to monetary policy analysis: Lessons and new directions

Author:

Jordi Galí

Date:

February 2008

Abstract:

I discuss several lessons regarding the design and conduct of monetary policy that have emerged out of the New Keynesian research program. Those lessons include the bene.ts of price stability, the gains from commitment about future policies, the importance of nat- ural variables as benchmarks for policy, and the bene.ts of a credible anti-inflationary stance. I also point to one challenge facing NK modelling efforts: the need to come up with relevant sources of policy tradeoffs. A potentially useful approach to meeting that challenge, based on the introduction of real imperfections, is presented.

Keywords:

Sticky prices, optimal policy, interest rate rules, policy tradeoffs, credibility, gains from commitment

JEL codes:

E52

Area of Research:

Macroeconomics and International Economics

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