Article ID Journal Published Year Pages File Type
967427 Journal of Monetary Economics 2014 14 Pages PDF
Abstract
The literature has long agreed that the divine coincidence holds in standard New Keynesian models: the monetary authority is able to simultaneously stabilize inflation and output gap in response to preference and technology shocks. I show that the divine coincidence holds only when inflation is stabilized at exactly zero. Even small deviations from zero generate policy trade-offs. I demonstrate this result using the model׳s non-linear equilibrium conditions to avoid biases from log-linearization. When the model is log-linearized, a non-zero steady state level of inflation gives rise to what I call the endogenous trend inflation cost-push shock in the New -Keynesian Phillips curve.
Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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