Monetary Policy for Inattentive Economies

Laurence Ball, N. Gregory Mankiw, Ricardo Reis

NBER Working Paper No. 9491
Issued in February 2003
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics

This paper is a contribution to the analysis of optimal monetary policy. It begins with a critical assessment of the existing literature, arguing that most work is based on implausible models of inflation-output dynamics. It then suggests that this problem may be solved with some recent behavioral models, which assume that price setters are slow to incorporate macroeconomic information into the prices they set. A specific such model is developed and used to derive optimal policy. In response to shocks to productivity and aggregate demand, optimal policy is price level targeting. Base drift in the price level, which is implicit in the inflation targeting regimes currently used in many central banks, is not desirable in this model. When shocks to desired markups are added, optimal policy is flexible targeting of the price level. That is, the central bank should allow the price level to deviate from its target for a while in response to these supply shocks, but it should eventually return the price level to its target path. Optimal policy can also be described as an elastic price standard: the central bank allows the price level to deviate from its target when output is expected to deviate from its natural rate.

download in pdf format
   (474 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w9491

Published: Ball, Laurence & Gregory Mankiw, N. & Reis, Ricardo, 2005. "Monetary policy for inattentive economies," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 703-725, May. citation courtesy of

Users who downloaded this paper also downloaded* these:
Mankiw and Reis w8290 Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve
Mankiw and Reis w15773 Imperfect Information and Aggregate Supply
Mankiw, Reis, and Wolfers w9796 Disagreement about Inflation Expectations
Mankiw and Reis w12605 Sticky Information in General Equilibrium
Mankiw, Reis, and Wolfers Disagreement about Inflation Expectations
NBER Videos

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

Contact Us