Working Paper: CEPR ID: DP15944
Authors: Pierpaolo Benigno; Lorenza Rossi
Abstract: Nonlinearities embedded in the standard New-Keynesian model show that a welfare-maximizing policymaker should behave in line with a contractionary bias, fearing more expansions in output and inflation rather than contractions. On the contrary, the aggregate-supply equation implies that any upward pressure coming from real marginal costs does not necessarily push up inflation. Once these two forces are combined in the optimal policy, an overall expansionary bias emerges. The nonlinearities of the AS equation combined with changes in volatility can be responsible for a flattening in the estimated linear Phillips curve.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| welfare-maximizing policymaker exhibits contractionary bias (D69) | contractionary bias (E62) |
| greater aversion to expansions in output and inflation (E31) | contractionary bias (E62) |
| nonlinearities in the utility function (D11) | contractionary bias (E62) |
| upward pressures from real marginal costs do not necessarily push up inflation (E31) | potential disinflationary bias (E31) |
| deviations from the target weaken the inflation-output trade-off (E61) | potential disinflationary bias (E31) |
| optimal targeting rule suggests inflation should overshoot target (E61) | expansionary bias (E62) |
| output gap contractions (E23) | inflation should overshoot target (E31) |