Inflation risk and optimal monetary policy
By: by William T. Gavin, Benjamin D. Keen, and Michael R. Pakko
Contributors: Keen, Benjamin D.; Pakko, Michael R.; Federal Reserve Bank of St. Louis
Series: Working paper -- 2006-035A; Working paper (Federal Reserve Bank of St. Louis : Online) -- 2006-035A.
Publisher: Federal Reserve Bank of St. Louis
Published: 2006
Place of publication: St. Louis, Mo.]
Language: eng
Format: [electronic resource] /
Description: "This paper shows that the optimal monetary policies recommended by New Keynesian models still imply a large amount of inflation risk.  We calculate the term structure of inflation uncertainty in New Keynesian models when the monetary authority adopts the optimal policy--the policy that minimizes the gap between output in the New Keynesian model and output in a flexible wage and price model.  When the monetary policy rules are modified to include a small weight on a price path, the economy achieves equilibria with substantially lower long-run inflation risk.  With sticky prices, the price path target reduces long-run inflation uncertainty with no measurable increase in the variability of the output gap.  With sticky wages, a tradeoff exists between short-run output stabilization and long-run inflation risk"--Federal Reserve Bank of St. Louis web site.
Notes: Title from PDF file as viewed on 6/1/2006.

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