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Optimal Monetary Policy, Endogenous Sticky Prices, and Multiple Equilibria

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  • Barseghyan Levon

    ()
    (Cornell University)

  • DiCecio Riccardo

    ()
    (Federal Reserve Bank of St. Louis)

Abstract

We analyze optimal discretionary monetary policy in an endogenous sticky prices model. Similar models with exogenous sticky prices can deliver multiple equilibria. This is a necessary condition for the occurrence of expectation traps (when private agents' expectations determine the equilibrium level of inflation). In our model, sticky-price firms are allowed to switch to flexible pricing by paying a random cost. For plausible parametrizations, our model has a unique low-inflation equilibrium. With endogenous sticky prices, the monetary authority does not validate high-inflation expectations and deviates to the Friedman rule.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 7 (2007)
Issue (Month): 1 (January)
Pages: 1-19

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Handle: RePEc:bpj:bejmac:v:7:y:2007:i:1:n:8

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Cited by:
  1. Henry Siu, 2005. "Time Consistent Monetary Policy with Endogenous Price Rigidity," 2005 Meeting Papers 821, Society for Economic Dynamics.
  2. David Arseneau, 2012. "Expectation traps in a new Keynesian open economy model," Economic Theory, Springer, vol. 49(1), pages 81-112, January.

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