Chapter 15 Nonlinear Phillips Curves, Endogenous NAIRU and Monetary Policy

Abstract

The recent literature on monetary policy has questioned the shape of the Phillips curve and the assumption of a constant NAIRU. In this paper, we explore monetary policy considering nonlinear Phillips curves and an endogenous NAIRU, which can be affected by the monetary policy. We first study monetary policy with different shapes of the Phillips curve: linear, convex and convex–concave. We find that the optimal monetary policy changes with the shape of the Phillips curve, but there exists a unique equilibrium no matter whether the Phillips curve is linear or nonlinear. We also explore monetary policy with an endogenous NAIRU, since some researchers, Blanchard (2003) for example, have proposed that the NAIRU may be influenced by monetary policy. Based on some empirical evidence and assuming that monetary policy can influence the NAIRU, we find that there may exist multiple equilibria in the economy, different from the results of models presuming a constant NAIRU.