Staggered Price Setting, Bertrand Competition and Optimal Monetary Policy

Federico Etro () and Lorenza Rossi

No 71, DEM Working Papers Series from University of Pavia, Department of Economics and Management

Abstract: We reconsider the New-Keynesian model with staggered price setting when each market is characterized by a small number of firms competing in prices à la Bertrand rather than a continuum of isolated monopolists. Price adjusters change their prices less when there are more firms that do not adjust, creating a natural and strong form of real rigidity. In a DSGE model with Calvo pricing and Bertrand competition, we obtain a modified New-Keynesian Phillips Curve with a lower slope. This reduces the level of nominal rigidities needed to obtain the estimated response of inflation to real marginal costs and to generate high reactions of output to monetary shocks. As a consequence, the determinacy region enlarges and the optimal monetary rule under cost push shocks, obtained through the linear quadratic approach, becomes less aggressive. Notably, the welfare gains from commitment decrease in more concentrated markets in reaction to inflationary shocks.

Keywords: New Keynesian Phillips Curve; Real rigidities; Sticky prices; Optimal monetary policy; Inflation; Endogenous entry (search for similar items in EconPapers)
JEL-codes: E3 E4 E5 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2014-03
New Economics Papers: this item is included in nep-com, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Staggered Price Setting, Bertrand Competition and Optimal Monetary Policy (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:pav:demwpp:demwp0071

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