OUTPUT STABILIZATION AND REAL RIGIDITY

We use a simple model to show that there is a positive relationship between monetary policy preferences for output stability, real rigidity and macroeconomic persistence. This result has two non-trivial implications. First it suggests that output stabilization may be a less desirable policy target since it generates real rigidity and macroeconomic persistence. Second, it provides a theoretical rationale as to why models in which monetary policy does not respond to output have been typically unable to replicate the persistence observed in real data. Copyright Blackwell Publishing Ltd and The University of Manchester, 2005.