Business Intelligence

Optimal Monetary Policy With State-Dependent Pricing

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Executive Summary

The authors study optimal monetary policy in a flexible state-dependent pricing framework, in which monopolistic competition and stochastic menu costs are the only distortions. They show analytically that it is optimal to commit to zero inflation in the long run. Moreover, the numerical simulations indicate that the optimal stabilization policy is "Price stability". These findings represent a generalization to a state-dependent framework of the same results found for the simple Calvo model with exogenous timing of price adjustment.

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