Optimal Monetary Policy, Endogenous Sticky Prices, and Multiple Equilibria

Levon Barseghyan and Riccardo DiCecio

The B.E. Journal of Macroeconomics, 2007, vol. 7, issue 1, 19

Abstract: We analyze optimal discretionary monetary policy in an endogenous sticky prices model. Similar models with exogenous sticky prices can deliver multiple equilibria. This is a necessary condition for the occurrence of expectation traps (when private agents' expectations determine the equilibrium level of inflation). In our model, sticky-price firms are allowed to switch to flexible pricing by paying a random cost. For plausible parametrizations, our model has a unique low-inflation equilibrium. With endogenous sticky prices, the monetary authority does not validate high-inflation expectations and deviates to the Friedman rule.

Keywords: optimal monetary policy; multiple equilibria; sticky prices (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (3)

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DOI: 10.2202/1935-1690.1428

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