Price setting and the steady-state effects of inflation

Miguel Casares

Spanish Economic Review, 2004, vol. 6, issue 4, 267-289

Abstract: This paper examines how price setting plays a key role in explaining the steady-state effects of inflation in a monopolistic competition economy with transactions-facilitating money. Three pricing variants (optimal prices, indexed prices, and unchanged prices) are introduced through a generalization of the Calvo-type setting that allows price indexation. We found that in an economy with less indexed prices, the steady-state negative impact of inflation on output is higher. Regarding welfare analysis, our results support a long-run monetary policy aimed at price stability with a close-to-zero inflation target. This finding is robust to any price setting scenario. Copyright Springer-Verlag Berlin/Heidelberg 2004

Keywords: Price setting; superneutrality; welfare cost of inflation (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s10108-004-0084-4

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