Gaps and Triangles

Bernardino Adao (), Pedro Teles and Isabel Correia ()

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: We derive principles of optimal short run monetary policy in a real business cycles model, with money and with monopolistic firms that set prices one period in advance. The only distortionary policy instruments are the nominal interest rates and the money supplies. In this environment it is feasible to undo both the cash in advance and the price setting restrictions. We show that the optimal allocation is achieved under the Friedman rule. We also show that, in general, it is not optimal to undo the restriction that prices are set one period in advance. Sticky prices provide the planner with tools to improve upon a distorted flexible prices allocation.

JEL-codes: E31 E41 E58 E62 (search for similar items in EconPapers)
Date: 2001
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Gaps and Triangles (2003)
Working Paper: Gaps and Triangles (2001)
Working Paper: Gaps and triangles (2001)
Working Paper: Gaps and Triangles (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w200102

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