Davig, Troy; Leeper, Eric M. - 2009
monetary policy
does not increase nominal rates strongly with inflation, so the real rate declines. The
lower real rate reduces …
monetary policy rule is
rt = α0(SMt ) +αpi(SMt )pit +αy(SMt )yt +σr(SMt )εrt, (24)
where pit is inflation, yt is the output gap …, raises current and future demand, so raises inflation expectations. Under
passive monetary policy, the monetary authority …