Economic Fluctuation and Stabilization

Abstract

This chapter introduces the equilibrium and dynamics of six sticky-price models. Section 7.1 features a model with an IS curve, a Phillips curve, a Taylor monetary policy rule, and inflation rate inertia. Section 7.2 presents a model that has the same equations as Section 7.1, but no inflation rate inertia in the Phillips curve. Section 7.3 is the new Keynesian model with no inflation rate inertia, an IS curve derived from the Euler equation, and a Phillips curve in the manner of Calvo. Section 7.4 presents an encompassing specification that has the Keynesian and new Keynesian models as particular cases. Section 7.5 deals with a model in which the Central Bank controls the growth rate of money according to the Friedman rule, and there is both price-level and inflation-rate inertia. Although no Central Bank in the world adopts this rule, the model has properties that make it appealing for didactic purposes. Section 7.6 presents a Keynesian model for chronic inflation, which is characterized by a monetary policy rule whereas the Central Bank issues money to finance the public deficit.