In this paper we generalise the standard optimal monetary policy literature as in Galí (2003) to the case of positive trend inflation. We present a simple framework that provides straightforward analytical results directly comparable with the standard case. Optimal monetary policy is strongly...

In the monetary policy literature it is commonly assumed that trend inflation is zero, despite overwhelming evidence that zero inflation is neither empirically relevant nor a practical objective for central bank policy. We therefore extend the standard New Keynesian model to allow for positive...

This paper studies the challenge that increasing the inflation target poses to equilibrium determinacy in a medium-sized New Keynesian model without indexation fitted to the Great Moderation era. For moderate targets of the inflation rate, such as 2 or 4 percent, the probability of...

This paper studies the challenge that increasing the inflation target poses to equilibrium determinacy in a medium-sized New Keynesian model without indexation fitted to the Great Moderation era. For moderate targets of the inflation rate, such as 2 or 4 percent, the probability of determinacy...

This paper studies the challenge that increasing the inflation target poses to equilibrium determinacy in a medium-sized New Keynesian model without indexation fitted to the Great Moderation era. For moderate targets of the inflation rate, such as 2 or 4 percent, the probability of determinacy...

Since 2000 U.S. inflation has remained both below target and silent to domestic slack. A trend-cycle BVAR decomposition shows that, starting from the ‘90s, despite well-anchored expectations, slow-moving imported ”cost-push” factors induced deflationary pressure keeping trend inflation...

Even low levels of trend inflation substantially affect the dynamics of a basic new Keynesian DSGE model when monetary policy is conducted by a contemporaneous Taylor rule. Positive trend inflation shrinks the determinacy region. Neither the Taylor principle, which requires the inflation...

Most macroeconomic models for monetary policy analysis are approximated around a zero-inflation steady state, but most central banks target inflation at a rate of about 2 percent. Many economists have recently proposed even higher inflation targets to reduce the incidence of the zero lower bound...