NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Science of Monetary Policy: A New Keynesian Perspective

Richard Clarida, Jordi Gali, Mark Gertler

NBER Working Paper No. 7147*
Issued in May 1999
NBER Program(s):   EFG    ME

This paper reviews the recent literature on monetary policy rules. We exploit 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.

*Published: Journal of Economic Literature, Vol. 37, no. 2 (December 1999): 1661-1707.

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