J. Bradford DeLong
What happens if a central bank decides to ease up on inflation--to try to run a lower level of unemployment for each possible level of inflation?
If workers, businesses, and investors in the economy have rational expectations, then such an easing of monetary policy generates an immediate upward shift in the Phillips curve.
Thus unemployment stays at its natural rate, and GDP stays at potential output. The only long-run or short-run effect of the easing of monetary policy is an immediate and permanent jump in inflation.
|The Monetary Policy Reaction Function Easing Policy--Adaptive Expectations Easing Policy--Rational Expectations|
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