Paper #356

Title:

The science of monetary policy: A new Keynesian perspective

Authors:

Richard Clarida, Jordi Galí and Mark Gertler

Date:

September 1997 (Revised: April 1999)

Abstract:

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 in 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.

Keywords:

Monetary policy, credibility, stabilization, new keynesian models

JEL codes:

E0, E5

Area of Research:

Macroeconomics and International Economics

Published in:

Journal of Economic Literature, 37, 4, (1999), pp. 1661-1707

Download the paper in PDF format