Oligopolistic competition and optimal monetary policy

Ester Faia

No 1552, Kiel Working Papers from Kiel Institute for the World Economy

Abstract: The literature has shown that product market frictions and firms dynamic play a crucial role in reconciling standard DSGE with several stylized facts. This paper studies optimal monetary policy in a DSGE model with sticky prices and oligopolistic competition. In this model firms' monopolistic rents induce both intra-temporal and intertemporal time-varying wedges which induce inefficient fluctuations of employment and consumption. The monetary authority faces a trade-off between stabilizing inflation and reducing inefficient fluctuations, which is resolved by using consumer price inflation as a state contingent sale subsidy. An analysis of the welfare gains of alternative rules show that targeting mark-ups and asset prices might improve upon a strict inflation targeting.

Keywords: Product market frictions; oligopolistic competition; optimal monetary policy (search for similar items in EconPapers)
JEL-codes: E3 E5 (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Journal Article: Oligopolistic competition and optimal monetary policy (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1552

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