Skip to main content

March/April 2000, 
Vol. 82, No. 2
Posted 2000-03-01

What Do New-Keynesian Phillips Curves Imply for Price-Level Targeting?

by Robert Dittmar and William T. Gavin

This article extends the analysis of price-level targeting to a model including the New-Keynesian Phillips Curve. The authors examine the inflation-output variability tradeoffs implied by optimal inflation and price-level rules. In previous work with the Neoclassical Phillips Curve, the authors found that the choice between inflation targeting and price-level targeting depended on the amount of persistence in the output gap. That is, if the output gap was not too persistent, or if lagged output did not enter the aggregate supply function, then inflation targets were preferred to price-level targets. When starting with a New-Keynesian Phillips Curve, the amount of persistence in the output gap still affects the relative placement of the inflation-output variability tradeoff. But, contrary to the Neoclassical case, even where the persistence of the output gap in the aggregate supply function is small or nonexistent, the price-level-targeting regime still results in a more favorable tradeoff between output and inflation variability than does an inflation-targeting regime.