The Non-Linear Phillips Curve and Inflation Forecast Targeting

Abstract

This paper extends the Svensson 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 forward-looking version of the reaction function popularized by Taylor. Extending the analysis with uncertainty about the output gap, it is found that uncertainty induces a further upward bias in nominal interest rates.