Nonlinear Phillips Curve and Monetary Policy in a Keynesian Macroeconometric Model

In the framework of a Keynesian monetary macro model we study implications of a kinked Phillips-Curve and alternativemonetary policy rules. As alternative monetary policy rules we consider monetary growth targeting and interest rate targeting (the Taylor rule). Our monetary macro model exhibits: asset market clearing, disequilibrium in product and labor markets, sluggish price and quantity adjustments, two Phillips-Curves for wage and price dynamics, and a combination of adaptive and forward looking expectations. Simulations of the model with our estimated parameters reveal global instability of its steady state. We show that monetary policy can stabilize the dynamics to some extent and that, in addition, an institutionally given kink in the money wage Phillips-Curve (downwardly rigid wages) represents a powerful tool for getting bounded, more or less irregular uctuations in the place of purely explosive ones. The obtained uctuations can be reduced in their size by choosing the parameters of monetary policy in a certain corridor, the exact position of which may however be very uncertain.