Optimal interest rate stabilization in a basic sticky-price model

Matthias Paustian and Christian Stoltenberg

No 2006-072, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: This paper studies optimal monetary policy with the nominal interest rate as the single policy instrument in an economy,where firms set prices in a staggered way without indexation and real money balances contribute separately to households'utility. The optimal deterministic steady state under commitment is the Friedman rule - even of the importance assigned to the utility of money is small relative to consumption and leisure. We approximate the model around the optimal steady state as the long-run policy target. Optimal monetary policy is characterized by stabilization of the nominal interest rate instead of inflation stabilization as the predominant principle.

Keywords: Optimal monetary policy; commitment; timeless perspective; optimal steady state; staggered price setting; monetary friction; Friedman's rule (search for similar items in EconPapers)
JEL-codes: E32 E52 E58 (search for similar items in EconPapers)
Date: 2006
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Journal Article: Optimal interest rate stabilization in a basic sticky-price model (2008)
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