Title: Financial Frictions, the Phillips Curve and Monetary Policy
Abstract: This paper proposes a tractable financial accelerator New Keynesian DSGE model that allows for closed-form solutions. In the presence of financial frictions, the New Keynesian Phillips curve features a flat slope with respect to the output gap and is strongly forward-looking. All shocks cause endogenous cost-push effects in the Phillips curve, leading to larger in inflation responses and a breakdown of divine coincidence. The central bank's contemporaneous trade-off between output gap and in inflation stabilization is aggravated. Optimal monetary policy is strongly forward-looking and geared towards inflation stabilization.
Publication Year: 2020
Publication Date: 2020-02-28
Language: en
Type: article
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