Time consistent monetary policy with endogenous price rigidity

Henry Siu

No 390, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: I characterize time consistent equilibrium in an economy with price rigidity and an optimizing> monetary authority operating under discretion. Firms have the option to increase their frequency> of price change, at a cost, in response to higher inflation. Previous studies, which assume a constant> degree of price rigidity across inflation regimes, find two time consistent equilibria ? one with low> inflation, the other with high inflation. In contrast, when price rigidity is endogenous, the high> inflation equilibrium ceases to exist. Hence, time consistent equilibrium is unique. This result> depends on two features of the analysis: (1) a plausible quantitative specification of the fixed cost> of price change, and (2) the presence of an arbitrarily small cost of inflation that is independent of> price rigidity.

Keywords: Monetary; policy (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Related works:
Journal Article: Time consistent monetary policy with endogenous price rigidity (2008)
Working Paper: Time consistent monetary policy with endogenous price rigidity (2006)
Working Paper: Time Consistent Monetary Policy with Endogenous Price Rigidity (2005)
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