State-dependent pricing turns money into a two-edged sword: A new role for monetary policy

Vo Phuong Mai Le, David Meenagh and A. Patrick Minford

Journal of International Money and Finance, 2021, vol. 119, issue C

Abstract: Strong evidence exists that price/wage durations are dependent on the state of the economy, especially inflation. We embed this dependence in a macro model of the US that otherwise does well in matching the economy’s behaviour in the last three decades; it now also matches it over the whole post-war period. This finding implies a major new role for monetary policy: besides controlling inflation it now determines the economy’s price stickiness. We find that, when backed by fiscal policy in preventing a ZLB, by targeting nominal GDP monetary policy can achieve high price stability and avoid large cyclical output fluctuations.

Keywords: State-dependence; New Keynesian; Rational Expectations; Crises; Price Stability; Nominal GDP (search for similar items in EconPapers)
JEL-codes: E2 E3 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:119:y:2021:i:c:s0261560621001479

DOI: 10.1016/j.jimonfin.2021.102496

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