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The case for inflation stability

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  • Collard, Fabrice
  • Dellas, Harris

Abstract

We evaluate the case for perfect price (inflation) stabilization in a New Keynesian (NNS) model that includes capital accumulation, a variety of shocks, a monetary and an imperfect competition distortion. In such a model, price rigidity may provide the monetary authorities with an opportunity to improve upon the inefficient flexible price equilibrium via the suitable cyclical manipulation of real marginal costs. We find that such an opportunity is of limited value. With only the imperfect competition friction present (in the ‘cashless’ version of the model), inflation variability is costly independent of the level of capital adjustment costs, the degree of price rigidity, the size of mark-ups, the degree of risk aversion and the type of the shock. A small amount of inflation variability may become desirable when prices are fairly flexible and capital adjustment costs low if the model includes both frictions.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 53 (2006)
Issue (Month): 8 (November)
Pages: 1801-1814

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Handle: RePEc:eee:moneco:v:53:y:2006:i:8:p:1801-1814

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Web page: http://www.elsevier.com/locate/inca/505566

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  1. Schmitt-Grohé, Stephanie & Uribe, Martín, 2001. "Solving Dynamic General Equilibrium Models Using a Second-Order Approximation to the Policy Function," CEPR Discussion Papers 2963, C.E.P.R. Discussion Papers.
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  4. Aubhik Khan & Robert King & Alexander L. Wolman, 2002. "Optimal monetary policy," Working Papers 02-19, Federal Reserve Bank of Philadelphia.
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  7. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
  8. Bernardino Adão & Isabel Horta Correia & Pedro Teles, 2001. "Gaps and Triangles," Working Papers w200102, Banco de Portugal, Economics and Research Department.
  9. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Optimal Fiscal and Monetary Policy Under Sticky Prices," Departmental Working Papers 200105, Rutgers University, Department of Economics.
  10. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
  11. Dale W. Henderson & Warwick J. McKibbin, 1993. "A comparison of some basic monetary policy regimes for open economies: implications of different degrees of instrument adjustment and wage persistence," International Finance Discussion Papers 458, Board of Governors of the Federal Reserve System (U.S.).
  12. Fabrice Collard & Harris Dellas, 2006. "Price Rigidity and the Selection of the Exchange Rate Regime," Open Economies Review, Springer, vol. 17(1), pages 5-26, January.
  13. Ireland, Peter N, 1996. "The Role of Countercyclical Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 704-23, August.
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Cited by:
  1. Jordi Caballe & Jana Hromcova, 2001. "The Role of Central Bank Operating Procedures in an Economy with Productive Government Spending," UFAE and IAE Working Papers 504.01, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  2. Berger, Wolfram, 2008. "Monetary policy rules and the exchange rate," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 1064-1084, September.

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