State-dependent pricing turns money into a two-edged sword

Vo Phuong Mai Le, David Meenagh and A. Patrick Minford

No E2019/15, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: Strong evidence exists that price/wage durations are dependent on the state of the economy, especially inflation. We embed this dependence in a macro model of the US that otherwise does well in matching the economy's behaviour in the last three decades; it now also matches it over the whole post-war period. This finding implies a major new role for monetary policy: besides controlling inflation it now determines the economy's price stickiness. We find that, when backed by fiscal policy in preventing a ZLB, by targeting nominal GDP monetary policy can achieve high price stability and avoid large cyclical output fluctuations.

Keywords: state-dependence; New Keynesian; Rational Expectations crises; price stability; nominal GDP (search for similar items in EconPapers)
JEL-codes: E2 E3 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2020-07
New Economics Papers: this item is included in nep-mac and nep-mon
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Working Paper: State-dependent pricing turns money into a two-edged sword (2020)
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