The non-linear Phillips curve and inflation forecast targeting

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 23 July 1999

Working paper No. 98
By Eric Schaling

This paper extends the Svensson (1997a) inflation forecast targeting framework with a convex Phillips curve. An asymmetric target rule is derived, which implies a higher level of nominal interest rates than the Svensson (1997a) forward-looking version of the reaction function popularised by Taylor (1993). Extending the analysis with uncertainty about the output gap, it is found that uncertainty induces a further upward bias in nominal interest rates.

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