Is there a trade-off between inflation and output stabilization?

This paper is a substantially revised and extended version of an earlier manuscript titled "Potential and Natural Output." We thank Jose Dorich, Gauti Eggertsson, Chris Erceg, Stefano Eusepi, Andrea Ferrero, Jordi Gali, John Leahy, Frank Smets, Lars Svensson, Carl Walsh, Mike Woodford and participants in several conferences and seminars for comments and suggestions, Ging Cee Ng for superb research assistance and especially Vasco Cúrdia for generously sharing his code for the computation of optimal equilibria. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Chicago, the Federal Reserve Bank of New York, the Federal Reserve System, or the National Bureau of Economic Research.