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Martin Harding, Jesper Lindé, and Mathias Trabandt
We propose a macroeconomic model with a nonlinear Phillips curve that has a flat slope when inflationary pressures are subdued and steepens when inflationary pressures are elevated. The nonlinear Phillips curve in our model arises due to a quasi-kinked demand schedule for goods produced by firms. Our model can jointly account for the modest decline in inflation during the Great Recession and the surge in inflation during the Post-Covid period. Because our model implies a stronger transmission of shocks when inflation is high, it generates conditional heteroskedasticity in inflation and inflation risk. Hence, our model can generate more sizeable inflation surges due to cost-push and demand shocks than a standard linearized model. Finally, our model implies that the central bank faces a more severe trade-off between inflation and output stabilization when inflation is high.
Lien Laureys, Mr. Roland Meeks, and Boromeus Wanengkirtyo

the inflation-output gap trade-off is still sufficiently pronounced in the absence of mark-up shocks for extreme hawkishness to lead to significantly larger welfare losses than those obtained for higher values of λ. 34 Figure 8. The role of mark-up shocks Note:The top left panel shows the best achievable combinations of the standard deviation of the output gap (x-axis) and the standard deviation of inflation (y-axis) for alternative weights on output gap stabilization (λ). The top right panel shows the best achievable combinations of volatilities in the

Lien Laureys, Mr. Roland Meeks, and Boromeus Wanengkirtyo
We reconsider the design of welfare-optimal monetary policy when financing frictions impair the supply of bank credit, and when the objectives set for monetary policy must be simple enough to be implementable and allow for effective accountability. We show that a flexible inflation targeting approach that places weight on stabilizing inflation, a measure of resource utilization, and a financial variable produces welfare benefits that are almost indistinguishable from fully-optimal Ramsey policy. The macro-financial trade-off in our estimated model of the euro area turns out to be modest, implying that the effects of financial frictions can be ameliorated at little cost in terms of inflation. A range of different financial objectives and policy preferences lead to similar conclusions.
Davide Debortoli, Mr. Jinill Kim, Jesper Lindé, and Mr. Ricardo C Nunes
Yes, it makes a lot of sense. This paper studies how to design simple loss functions for central banks, as parsimonious approximations to social welfare. We show, both analytically and quantitatively, that simple loss functions should feature a high weight on measures of economic activity, sometimes even larger than the weight on inflation. Two main factors drive our result. First, stabilizing economic activity also stabilizes other welfare relevant variables. Second, the estimated model features mitigated inflation distortions due to a low elasticity of substitution between monopolistic goods and a low interest rate sensitivity of demand. The result holds up in the presence of measurement errors, with large shocks that generate a trade-off between stabilizing inflation and resource utilization, and also when ensuring a low probability of hitting the zero lower bound on interest rates.
Maral Shamloo
In this paper I study the effect of imperfect central bank commitment on inflationary outcomes. I present a model in which the monetary authority is a committee that consists of members who serve overlapping, finite terms. Older and younger generations of Monetary Policy Committee (MPC) members decide on policy by engaging in a bargaining process. I show that this setup gives rise to a continuous measure of the degree of monetary authority's commitment. The model suggests that the lower the churning rate or the longer the tenure time, the closer social welfare will be to that under optimal commitment policy.
Davide Debortoli, Mr. Jinill Kim, Jesper Lindé, and Mr. Ricardo C Nunes

, as the model features a prominent inflation-output gap trade-off along the efficient frontier as defined in the seminal work of Taylor (1979) and Clarida, Galí and Gertler (1999) . At first glance, this inflation-output gap trade-off may appear to be contradictory to Justiniano, Primiceri and Tambalotti (2013) , who argue that there is no important trade-off between stabilizing inflation and the output gap. However, the different findings can be reconciled by recognizing that the key drivers behind the trade-off in the SW model—the price- and wage-markup shocks

Maral Shamloo

of different MPC members I refer to this model as a model of overlapping generations of MPC members. Each MPC member’s loss function is defined over their two-period tenure and penalizes them for deviations of inflation and output gap from their respective targets. The setup is otherwise standard to the New Keynesian literature (see Clarida, Gali, and Gertler (1999) , McCallum and Nelson (2004) , and Woodford (2003) , Ch. 7). The inflation-output gap trade-off is governed by a Phillips curve which can be derived from a variety of price rigidity models, such as a

Martin Harding, Jesper Lindé, and Mathias Trabandt

implies a rather unfavorable monetary policy inflation-output gap trade-off. To reduce inflation by 0.1 percentage points the policy maker needs to accept a decline of more than 1% in the output gap over one year. Figure 6 implies this trade-off is further exacerbated in the nonlinear model in the current situation of high inflation risk, as it takes even tighter monetary policy than shown in the figure to maintain a pass-through of price cost-push shocks to inflation at normal levels according to our estimated model. Figure 7: IRFs to a 1 σ Monetary Shock in