Nonlinear Phillips curve, NAIRU and monetary policy rules Hyeon-seung Huh

The U.S. Phillips curve is modeled with an LSTAR specification, which is flexible to allow various nonlinear shapes. Using this model, we present a method to derive model-consistent estimates of the NAIRU. An additional feature is that the NAIRU is defined as a leading indicator of inflation changes over the policy horizon. We then investigate the implications of this nonlinear Phillips curve for the derivation of optimal monetary policy rules. The optimal policy rule is proven to be nonlinear too. Empirical results show that this nonlinear rule, together with the model-consistent NAIRU measure, may offer some assistance in understanding the conduct of U.S. monetary policy