The Phillips Curve and Optimal Policy in a Structural Signal Extraction Model |
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| Institution: | 1. FRBNY, 33 Liberty Street, New York, NY 10045 United States;2. University of Texas at Austin, 2225 Speedway, Austin, TX 78712, United States;3. FRBNY & IZA, 33 Liberty Street, New York, NY 10045, United States;1. National Bank of Slovakia, Slovakia;2. Comenius University Bratislava, Slovakia;3. Goethe University Frankfurt, Germany;4. University of Chicago Booth School of Business, USA;5. CEPR, United Kingdom;6. NBER, USA;7. European Central Bank, Germany;1. Board of Governors of the Federal Reserve System, Division of Monetary Affairs, United States;2. Board of Governors of the Federal Reserve System, Division of Financial Stability, United States;3. University of Cologne, QuantCo, Inc., United States |
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| Abstract: | We study a monetary economy subject to “signal extraction” problems, and investigate within that framework the positive and normative aspects of monetary policy. As in Lucas (1972, Journal of Economic Theory,4, 103–124; 1973, American Economic Review, 63, 326–334), imperfect signal perception generates macroeconomic correlations similar to those found in the “Phillips curve” literature. Moving to normative aspects, we find that, when aggregate shocks are present, traditional nonactivist policies do not permit reaching the first best, and that an intelligent activist policy always leads to better outcomes. The specific characteristics and effectiveness of this optimal policy also depend crucially on the problem of signal extraction. Journal of Economic Literature Classification Number: E5. |
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