The central bank in the New Keynesian model pursues a policy of

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The central bank in the New Keynesian model pursues a policy of targeting the market interest rate in order to achieve the desired level of inflation and output. This is accomplished by adjusting the short-term nominal interest rate in response to changes in the economy's inflation rate and output gap. The central bank sets its target interest rate based on its assessment of the economy's potential output, the expected inflation rate, and the degree of economic slack. This allows the central bank to respond to changes in the economic conditions, while at the same time providing a stable anchor for inflation expectations.

The Central Bank in the New Keynesian Model Pursues a Policy