Title: Inflation risk and optimal monetary policy
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.