Stabilizing Powers of Monetary Policy under Rational Expectations

@article{Phelps1977StabilizingPO,
  title={Stabilizing Powers of Monetary Policy under Rational Expectations},
  author={Edmund S. Phelps and John B. Taylor},
  journal={Journal of Political Economy},
  year={1977},
  volume={85},
  pages={163 - 190}
}
The potential of monetary policy to stabilize fluctuations in output and employment is demonstrated in a stochastic rational expectations model in which firms choose, considering average profitability, to set prices in advance of the period when they apply to goods sold. This lead time in pricing decisions increases the fluctuations of output about the normal employment level. But proper use of a feedback monetary policy rule can reduce these fluctuations even though expectations are rational… Expand
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