Monetary policy with a flat Phillips curve
In this paper, Beaudry and al. explore the monetary policy implications of a locally flat Phillips curve when a cost channel of monetary policy may also be present. According to the authors, the New Keynesian Phillips curve model exhibits local flatness when parameters of the curve satisfy a so called “Patman Condition”, a situation where the direct cost of monetary policy on the marginal cost is greater than the indirect one on the output gap. In particular, when the Patman condition holds they show that traditionally prescribed anti-inflationary responses to shocks can have qualitatively different effects on inflation:
- In response to supply and demand shocks, engineering a rise in real interest rates that is either too small or not sufficiently persistent will push inflation further away from its target;
- In both situations, doing nothing may be better at stabilizing inflation than increasing interest rates timidly.
Monetary Policy when the Phillips Curve is Locally Quite Flat
Authors: Paul Beaudry, Chenyu Hou, Franck Portier
From: Bank of Canada, University of British Columbia, University College London
