Optimal Taylor Rules in New Keynesian Models
University of Michigan
Standard three-equation New Keynesian model with Phillips Curve, IS curve, and Taylor rule; includes measurement error in output gap and inflation observations
monopolistic competition with Calvo pricing
Optimal Taylor rule minimizes weighted sum of squared inflation and output gap; steady state inflation target is zero
The paper analyzes optimal Taylor rule coefficients to minimize welfare loss function with inflation and output gap; the implicit optimal inflation target is zero (price stability)