Oligopolistic competition and optimal monetary policy

Ester Faia

Journal of Economic Dynamics and Control, 2012, vol. 36, issue 11, 1760-1774

Abstract: This paper studies optimal monetary policy in a DSGE model with supply side strategic complementarity, as arising from oligopolistic competition, and nominal rigidities. Firms' oligopolistic rents induce inefficient fluctuations through both, intra-temporal and intertemporal time-varying wedges. Optimality requires the use of state contingent inflation taxes to smooth and reduce firms' rents. Hence, under optimal (Ramsey) policy PPI deviates significantly from zero. A comparison of welfare costs for a set of operational rules relatively to the Ramsey plan shows that targeting the output gap, the mark-up and the asset price improves upon a rule with aggressive response to inflation.

Keywords: Product market frictions; Oligopolistic competition; Optimal monetary policy (search for similar items in EconPapers)
JEL-codes: E3 E4 E5 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (27)

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Working Paper: Oligopolistic competition and optimal monetary policy (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:36:y:2012:i:11:p:1760-1774

DOI: 10.1016/j.jedc.2012.07.001

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