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Optimal Monetary Policy with Relative Price Distortions

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Tack Yun
Abstract

This paper analyzes optimal monetary policy in a sticky price model with Calvo-type staggered price-setting. In the paper, the optimal monetary policy maximizes the expected utility of a representative household without having to rely on a set of linearly approximated equilibrium conditions, given the distortions associated with the staggered price-setting. It shows that the complete stabilization of the price level is optimal in the absence of initial price dispersion, while optimal inflation targets respond to changes in the level of relative price distortion in the presence of initial price dispersion.

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File URL: http://hdl.handle.net/10.1257/0002828053828653
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File URL: http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=1&article=5&issue_date=March2005
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 95 (2005)
Issue (Month): 1 (March)
Pages: 89-109
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Handle: RePEc:aea:aecrev:v:95:y:2005:i:1:p:89-109

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December. [Downloadable!] (restricted)
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  2. V. V. Chari & Patrick J. Kehoe, 1999. "Optimal Fiscal and Monetary Policy," NBER Working Papers 6891, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Guido Ascari, 2004. "Staggered prices and trend inflation: some nuisances," Macroeconomics 0404029, EconWPA. [Downloadable!]
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  4. Richard Clarida & Jordi Gali & Mark Gertler, 2001. "Optimal Monetary Policy in Open versus Closed Economies: An Integrated Approach," American Economic Review, American Economic Association, vol. 91(2), pages 248-252, May. [Downloadable!] (restricted)
  5. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. NAKAJIMA Tomoyuki, 2009. "Optimal Monetary Policy with Imperfect Unemployment Insurance," Discussion papers 09014, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
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  2. Jinill Kim & Andrew Levin & Tack Yun, 2006. "Relative Price Distortion and Optimal Monetary Policy in Open Economies," Computing in Economics and Finance 2006 211, Society for Computational Economics. [Downloadable!]
  3. Lawrence Christiano & Roberto Motto & Massimo Rostagno, 2007. "Two Reasons Why Money and Credit May be Useful in Monetary Policy," NBER Working Papers 13502, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Montoro Carlos, 2007. "Oil Shocks and Optimal Monetary Policy," Working Papers 2007-010, Banco Central de Reserva del Perú. [Downloadable!]
  5. James Costain & Antón Nákov, 2009. "Dynamics of the price distribution in a general model of state-dependent pricing," Banco de España Working Papers 0831, Banco de España. [Downloadable!]
  6. Tatiana Damjanovic & Charles Nolan, 2006. " Relative Price Distortions and Inflation Persistence," CDMA Working Paper Series 0611, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
  7. Jinill Kim & Andrew T. Levin & Tack Yun, 2007. "Diagnosing and treating bifurcations in perturbation analysis of dynamic macro models," Finance and Economics Discussion Series 2007-14, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  8. Guido Ascari & Tiziano Ropele, 2009. "Disinflation in a DSGE Perspective: Sacrifice Ratio or Welfare Gain Ratio?," Kiel Working Papers 1499, Kiel Institute for the World Economy. [Downloadable!]
  9. Ray C. Fair, 2006. "Evaluating Inflation Targeting Using a Macroeconometric Model," Cowles Foundation Discussion Papers 1570, Cowles Foundation, Yale University, revised Mar 2007. [Downloadable!]
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