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Inflation Targets, Credibility, and Persistence
In a Simple Sticky-Price Framework
Jeremy Rudd
Federal Reserve Board
Karl Whelan
Central Bank of Ireland
July 23, 2003
Abstract
This paper presents a re-formulated version of a canonical sticky-price model that has
been extended to account for variations over time in the central bank's inflation tar-
get. We derive a closed-form solution for the model, and analyze its properties under
various parameter values. The model is used to explore topics relating to the e ects of
disinflationary monetary policies and inflation persistence. In particular, we employ the
model to illustrate and assess the critique that standard sticky-price models generate
counterfactual predictions for the e ects of monetary policy.
Corresponding author. Mailing address: Mail Stop 80, 20th and C Streets NW, Washington, DC 20551.
E-mail: jeremy.b.rudd@frb.gov.
E-mail: karl.whelan@centralbank.ie. We thank Gregory Mankiw and Olivier Blanchard for useful dis-
cussions on several of the topics considered here. The views expressed in this paper are our own, and do
not necessarily reflect the views of the Board of Governors, the sta of the Federal Reserve System, or the
Central Bank of Ireland.
1 Introduction
An important trend in macroeconomic research in recent years involves the increased use
of optimization-based sticky-price models to analyze how monetary policy a ects the econ-
omy and how optimal policy should be designed. Much of this analysis employs a simple
baseline model that features a \new-Keynesian" Phillips curve to characterize inflation, an
\expectational IS curve" to determine output growth, and a policy rule that describes how
the central bank sets short-term interest rates; representative examples of studies that use
this...
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