Strike while the iron is hot: optimal monetary policy with a nonlinear Phillips curve

Peter Karadi, Anton Nakov, Galo Nuno Barrau, Ernesto Pasten and Dominik Thaler

No 1203, BIS Working Papers from Bank for International Settlements

Abstract: We study the Ramsey optimal monetary policy within the Golosov and Lucas (2007) state-dependent pricing framework. The model provides microfoundations for a nonlinear Phillips curve: the sensitivity of inflation to activity increases after large shocks due to an endogenous rise in the frequency of price changes, as observed during the recent inflation surge. In response to large cost-push shocks, optimal policy leverages the lower sacrifice ratio to reduce inflation and stabilize the frequency of price adjustments. At the same time, when facing total factor productivity shocks, an efficient disturbance, the optimal policy commits to strict price stability, similar to the prescription in the standard Calvo (1983) model.

Keywords: state-dependent pricing; large shocks; nonlinear Phillips curve; optimal monetary policy (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
Date: 2024-08
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
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Related works:
Working Paper: Strike While the Iron Is Hot: Optimal Monetary Policy with a Nonlinear Phillips Curve (2024)
Working Paper: Strike while the Iron is Hot: Optimal Monetary Policy with a Nonlinear Phillips Curve (2024)
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