Myopia, Discretion, and Commitment in a Two-Period AS/AD Model

A large body of pedagogical literature has recently emerged to place the New Keynesian framework for analyzing business cycle fluctuations and the conduct of monetary policy into undergraduate economics curricula. This paper develops the graphical apparatus for the analysis of optimal monetary policy in the context of a two period model under alternative assumptions about the formation of inflationary expectations. It demonstrates that differences in assumptions about the formation of inflationary expectations translate into quite different conclusions regarding the optimal conduct of monetary policy