Recent literature on the design of optimal monetary policy has shown that deviations from price stability are small whenever prices are sticky. This paper reconsiders this issue by introducing capital accumulation in the model. Optimal monetary policy in this setup implies small deviations from price stability. The monetary authority optimally uses inflation as an explicit tax on monopolistic profits to reduce the price markup across states. Variable markup is achieved in this setup because the share of investment demand over output varies across states and in response to TFP shocks.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.