Optimal long-run inflation and the New Keynesian model
Neapolis University Pafos, Business School
Standard New Keynesian model extended with rule-of-thumb price setters à la Galí and Gertler (1999), where a fraction of firms use backward-looking pricing rules based on lagged inflation rather than forward-looking optimization
monopolistic competition with Calvo staggered price setting; fraction (1-ω) forward-looking optimizers, fraction ω rule-of-thumb backward-looking price setters
Equation 13 p.1081 and Section 3
Standard New Keynesian model without rule-of-thumb price setters (omega=0), optimal commitment policy