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The Science of Monetary Policy: A New Keynesian Perspective

Richard H. Clarida¹; Jordi Galí²; Mark Gertler³

¹ Columbia University and NBER · ² New York University, Universitat Pompeu Fabra, CEPR, and NBER. · ³ New York University and NBER

The paper reviews the recent literature on monetary policy rules. We exposit the monetary policy design problem within a simple baseline theoretical framework. We then consider the implications of adding various real world complications. Among other things, we show that the optimal policy implicitly incorporates inflation targeting. We also characterize the gains from making a credible commitment to fight inflation. In contrast to conventional wisdom, we show that gains from commitment may emerge even if the central bank is not trying to inadvisedly push output above its natural level. We also consider the implications of frictions such as imperfect information.

DOI

10.1257/jel.37.4.1661

Volume

37 (4)

Pages

1661-1707

Language

en

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BibTeX

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