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Phillips Curve Instability and Optimal Monetary Policy By Troy Davig
First version: July 2007 |
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Abstract This paper assesses the implications for optimal
discretionary monetary policy if the slope of the Phillips curve changes.
The paper first derives a Phillips curve from the optimal pricing decision
of a monopolistic firm that faces a changing cost of price adjustment. The
second aspect of the paper constructs a utility-based welfare criterion. A
novel feature of this criterion is that is has a relative weight on output
gap deviations that changes synchronously with changes in the cost of price
adjustment. The systematic component of the targeting rule that implements
the optimal discretionary policy under the utility-based criteria is
constant. In contrast, the systematic component of the targeting rule under
an ad-hoc criteria changes along with changes in the slope of the Phillips
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