Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework and its Applications

"This is a book that I would suggest mostly for people starting a PhD. It’s very technical. It talks about monetary economics and inflation in a very technical way, but of the books of that kind it’s the easiest and gives you an overview of the vision of the so-called New Keynesian model. Jordi is an amazing writer. There is a lot of intuition, despite the use of a lot of maths. It helps you to understand, first of all, how inflation is created in a mathematical model but, most importantly, why we care about it. “There is no unique definition of inflation” Jordi says that, in some sense, we care about inflation because of this feedback effect on output—employment and inflation are strictly linked together. A key element of the model economy in the book is price rigidity, firms do not immediately adjust prices. Now, if firms do not adjust prices, if they experience an increase or a decrease in the overall price level, then they need to adjust production in the short run. So if you have higher inflation, then you’re going to have some effect on the output through this mechanism. The book describes this mechanism, and then it describes the optimal monetary policy. The book discusses the connection between inflation and the real side of the economy, and why the central bank should care about inflation. Jordi also explains the conditions under which stabilizing inflation and stabilizing output and employment, in the short run, is exactly the same. This result is known as the ‘divine coincidence.’"

"Yes. It is the state-of-the-art—or at least an introduction to the state-of-the-art—in monetary policy. It’s pure orthodox New Keynesianism . It has a very specific use and therefore it’s not for everybody. It’s not for everybody who enrols in a PhD programme. It’s not for everybody who enrols in a PhD who wants to do macroeconomics. It is for those people who are enrolling in a PhD, who want to do macroeconomics and, in particular, who want to understand deeply how a central bank works. Support Five Books Five Books interviews are expensive to produce. If you're enjoying this interview, please support us by donating a small amount . So, it’s really narrow, but it’s still a fundamental book. I say narrow, but of course, monetary policy is one of the biggest sub-fields in macro. And, especially if you are interested in macroeconomic policy, then monetary policy is one of the two key things you need to have. It’s a classic in central banking and monetary policy. I wouldn’t say that this is a book about unconventional monetary policy. It’s more like a classic book of central banking. They may be mentioned, but I don’t think this is the book to go to if you want to understand unconventional monetary policies. But, in my opinion, in order to approach unconventional monetary policy, you first need to fully understand how a central bank works in a classical sense, when the interest rate is away from the zero lower bound."