Output-Inflation Trade-off: A New Keynesian Approach

Abstract

The first-order conditions derived from minimizing a quadratic loss function subject to an expectational IS curve and a New Keynesian Phillips curve interpret the tradeoff between output and inflation. We estimate the policy weights imposed on the output gap relative to inflation with the Generalized Method of Moments (GMM) technique. The results show that both inflation rate and degree of openness have positive relationships with the output-inflation tradeoff. A disinflationary environment or a country with a moderate degree of openness tends to have a favorable trade-off.