Optimal monetary policy with state-dependent pricing

Anton Nakov and Carlos Thomas

No 1130, Working Papers from Banco de España

Abstract: We study optimal monetary policy from the timeless perspective in a general state-dependent pricing framework. Firms are monopolistic competitors and are subject to idiosyncratic menu cost shocks. We find that, under isoelastic preferences and no government spending, strict price stability is optimal both in the long run and in response to aggregate shocks. Key to this finding is an “envelope” property: at zero inflation, a marginal increase in the rate of inflation has no effect on firms’ profits and therefore has no effect on the rate of price adjustment. We offer an analytic solution which does not rely on local approximation or efficiency of the steady-state.

Keywords: monetary policy; state-dependent pricing; monopolistic competition (search for similar items in EconPapers)
JEL-codes: E31 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2011-11
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Optimal Monetary Policy with State-Dependent Pricing (2014)
Working Paper: Optimal Monetary Policy with State-Dependent Pricing (2014)
Working Paper: Optimal monetary policy with state-dependent pricing (2011)
Working Paper: Optimal monetary policy with state-dependent pricing (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1130

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