NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Effective Monetary Policy Strategies in New Keynesian Models: A Re-examination

Hess Chung, Edward Herbst, Michael T. Kiley

NBER Working Paper No. 20611
Issued in October 2014
NBER Program(s):   EFG   ME

We explore the importance of the nature of nominal price and wage adjustment for the design of effective monetary policy strategies, especially at the zero lower bound. Our analysis suggests that sticky-price and sticky-information models fit standard macroeconomic time series comparably well. However, the model with information rigidity responds differently to anticipated shocks and persistent zero-lower bound episodes - to a degree important for monetary policy and for understanding the effects of fundamental disturbances when monetary policy cannot adjust. These differences may be important for understanding other policy issues as well, such as fiscal multipliers. Despite these differences, many aspects of effective policy strategy are common across the two models: In particular, highly inertial interest rate rules that respond to nominal income or the price level perform well, even when hit by adverse supply shocks or large demand shocks that induce the zero-lower bound. Rules that respond to the level or change in the output gap can perform poorly under those conditions.

download in pdf format
   (599 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w20611

Published: Hess Chung & Edward Herbst & Michael T. Kiley, 2015. "Effective Monetary Policy Strategies in New Keynesian Models: A Reexamination," NBER Macroeconomics Annual, University of Chicago Press, vol. 29(1), pages 289 - 344. citation courtesy of

Users who downloaded this paper also downloaded* these:
Cochrane w20613 Monetary Policy with Interest on Reserves
Fernald, Spiegel, and Swanson w20518 Monetary Policy Effectiveness in China: Evidence from a FAVAR Model
Stiglitz w20517 Reconstructing Macroeconomic Theory to Manage Economic Policy
Clarida w20545 Monetary Policy in Open Economies: Practical Perspectives for Pragmatic Central Bankers
Federico, Vegh, and Vuletin w20612 Reserve Requirement Policy over the Business Cycle
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us