A Generalized Rational Expectations Phillips Curve Resolves the Monetary Policy Sign Paradox

r. I add lagged expectations to a Lucas Phillips curve, in the style of Mankiw and Reis. The resulting model is initially unstable, so that inflation builds over time in response to a shock. In the long run though, inflation is stable. This change solves the puzzle that in the standard textbook model inflation and output both rise in response to higher interest rates, allowing at most a single initial downward jump. Read the paper>