As noted in surveys by Goodfriend and King (1997) and Walsh (1998) and exemplified by models analyzed in Taylor (1999), there is encouraging progress in developing optimizing trend-deviation macro models that provide useful insights into the transmission and design of monetary policy. Several controversial features of a minimalist trend-deviation model, with optimizing households, firms, and bond traders, are examined. Dynamic specifications are suggested to improve the data-based realism, while preserving the simplicity, of the minimalist model.

Keywords: New-Keynesian macro models; optimizing IS; Phillips curve; time-varying term premiums.

JEL Classification: E3, E5

Sharon Kozicki is an assistant vice president and economist at the Federal Reserve Bank of Kansas City. P.A. Tinsley is a lecturer on the Faculty of Economics and Politics at the University of Cambridge, Cambridge, England. The views expressed in this paper are those of the authors and do not necessarily represent the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System.

Kozicki E-mail: sharon.kozicki@kc.frb.org
Tinsley E-mail: ptinsley@econ.cam.ac.uk