Price Level Stabilization Experiments Using the Dynamic Phillips Curve Concept

Abstract

This paper deals with the price-level stabilization issue from a monetarist point of view. Government fiscal action is assumed to be ineffective without corresponding monetary actions. The price-level stabilization is studied here using the dynamic econometric model developed by the St. Louis Federal Reserve Bank and, employing a linear parameterised control law, optimized monetary policies are found which drive the economy to specified target inflation rates. The economic response is described in terms of dynamic Phillips curves and the tradeoff between short term unemployment and long term stabilized inflation rates is given. The control solution indicates that optimized monetary policy should be initially contractionary, followed by a mild expansionary phase. There is a short term rise in unemployment which is the price paid for stabilized low inflation rates.