The New Neoclassical Synthesis and the Role of Monetary Policy

Macroeconomics is moving toward a New Neoclassical Synthesis, which like the synthesis of the 1960s melds classical with Keynesian ideas. This paper describes
the key features of the new synthesis and its implications for the role of monetary policy. We find that the New Neoclassical Synthesis rationalizes an activist
monetary policy, which is a simple system of inflation targets. Under this "neutral" monetary policy, real quantities evolve as suggested in the literature on real
business cycles. Going beyond broad principles, we use the new synthesis to address several operational aspects of inflation targeting. These include its practicality, the response to oil shocks, the choice of price index, the design of a mandate, and the tactics of interest rate policy.