“…Equation (1) gives aggregate demand, y t , as a function of this period's expectation, E t ; of demand next period, y t+1 , and of the expected real interest rate, where R t is the policy rate, E t t+1 is the next period expectation of in ‡ation and is the intertemporal rate of substitution in output. 4 Equation (2) is the forward-looking New Keynesian Phillips curve that relates current in ‡ation, t , to discounted expected next period in ‡ation, where is the subjective discount factor, and is proportional to the deviation of aggregate demand from supply, where is the slope of the Phillips curve. 5 The term is related to two deep parameters in the underlying Calvo-Yun model (see Yun, 1996): the probability of …rms maintaining a …xed price in the next period, , and the subjective discount factor, : In in ‡ation space can be shown to be equal to (1 ) (1 ) and thus in price space, with the deviation in the price level proportional to in ‡ation (see equation 6), the Phillips curve becomes:…”