Survey_HM_2003

Abstract

The model we employ is the standard New Keynesian model of monopolistic competition and (Calvo 1983) price stickiness. This model has been employed in numerous recent studies of monetary policy, see e.g. (Clarida, Gali, and Gertler 1999) for a survey. The derivation is based on individual Euler equations under (identical) subjective expectations, together with aggregation and definitions of the variables. The Euler equations for the current period give the decisions as functions of the expected state next period. Rules for forecasting the next period’s values of the state variables are the other ingredient in the description of individual behavior. Given forecasts, agents are assumed to make decisions according to the Euler equations.