by Werner Roegera and Bernhard Herzb
We identify a crucial difference between the backward-ooking and forward-looking Phillips curve concerning the real output effects of monetary policy shocks. The backward-ooking Phillips curve predicts a strict intertemporal trade-off in the case of monetary shocks: a positive short-run response of output is followed by a period in which output is below baseline and the cumulative output effect is exactly zero. In contrast, the forward-looking model implies a positive cumulative output effect. The empirical evidence on the cumulated output effects of money is consistent with the forward-looking model. We also use this method to determine the degree of forward-looking price setting.
JEL Codes: E31, E32, E40.
Full article (PDF, 23 pages 369 kb)
a European Commission
b University of Bayreuth