Strike while the iron is hot – optimal monetary policy under state-dependent pricing

Peter Karadi, Anton Nakov, Galo Nuño, Ernesto Pasten and Dominik Thaler

No 3068, Working Paper Series from European Central Bank

Abstract: We characterize optimal monetary policy under state-dependent pricing. The framework gives rise to nonlinear inflation dynamics: The flexibility of the price level increases after large shocks due to an endogenous rise in the frequency of price changes. In response to large cost-push shocks, optimal policy leverages the lower sacrifice ratio to curb inflation. When faced with total factor productivity shocks, an efficient disturbance, the optimal policy commits to strict price stability. The optimal long-run inflation rate is just above zero. JEL Classification: E31, E32, E52

Keywords: large shocks; nonlinear Phillips curve; optimal monetary policy; state-dependent pricing (search for similar items in EconPapers)
Date: 2025-07
New Economics Papers: this item is included in nep-dge and nep-mon
Note: 1871516
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20253068

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