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State-dependent pricing turns money into a two-edged sword: A new role for monetary policy

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  • Le, Vo Phuong Mai
  • Meenagh, David
  • Minford, Patrick

Abstract

Strong evidence exists that price/wage durations are dependent on the state of the economy, especially inflation. We embed this dependence in a macro model of the US that otherwise does well in matching the economy’s behaviour in the last three decades; it now also matches it over the whole post-war period. This finding implies a major new role for monetary policy: besides controlling inflation it now determines the economy’s price stickiness. We find that, when backed by fiscal policy in preventing a ZLB, by targeting nominal GDP monetary policy can achieve high price stability and avoid large cyclical output fluctuations.

Suggested Citation

  • Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick, 2021. "State-dependent pricing turns money into a two-edged sword: A new role for monetary policy," Journal of International Money and Finance, Elsevier, vol. 119(C).
    • Handle: RePEc:eee:jimfin:v:119:y:2021:i:c:s0261560621001479
    DOI: 10.1016/j.jimonfin.2021.102496
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    Cited by:

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    2. Minford, Patrick, 2023. "Where next for monetary policy? lessons from the financial crisis and the pandemic," Cardiff Economics Working Papers E2023/25, Cardiff University, Cardiff Business School, Economics Section.
    3. Chen, Haixia & Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick, 2023. "UK Monetary Policy in An Estimated DSGE Model with State-Dependent Price and Wage Contracts," Cardiff Economics Working Papers E2023/22, Cardiff University, Cardiff Business School, Economics Section.

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    More about this item

    Keywords

    State-dependence; New Keynesian; Rational Expectations; Crises; Price Stability; Nominal GDP;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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