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A primer on optimal monetary policy with staggered price-setting

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Author Info
Alexander L. Wolman

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Abstract

Three notions of optimal monetary policy are applied to a model in which firms set their prices for multiple periods. The best steady state inflation rate is slightly positive, but the policy that maximizes present discounted welfare leads in the long run to zero inflation. If commitment is not feasible, a benevolent monetary authority will choose relatively high inflation.

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File URL: http://www.richmondfed.org/publications/economic_research/economic_quarterly/pdfs/fall2001/wolman.pdf
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Publisher Info
Article provided by Federal Reserve Bank of Richmond in its journal Economic Quarterly.

Volume (Year): (2001)
Issue (Month): Fall ()
Pages: 27-52
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Handle: RePEc:fip:fedreq:y:2001:i:fall:p:27-52

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Related research
Keywords: Monetary policy Inflation (Finance) Prices

References listed on IDEAS
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. Marvin Goodfriend & Robert G. King, 2001. "The case for price stability," Working Paper 01-02, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
  2. Aubhik Khan & Robert King & Alexander L. Wolman, 2002. "Optimal monetary policy," Working Papers 02-19, Federal Reserve Bank of Philadelphia. [Downloadable!]
    Other versions:
  3. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August. [Downloadable!] (restricted)
    Other versions:
  4. Robert G. King & Alexander L. Wolman, 1996. "Inflation Targeting in a St. Louis Model of the 21st Century," NBER Working Papers 5507, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Bennett T. McCallum, 1996. "Neoclassical vs. endogenous growth analysis: an overview," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 41-71. [Downloadable!]
    Other versions:
  6. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April. [Downloadable!] (restricted)
  7. Kydland, Finn E. & Prescott, Edward C., 1980. "Dynamic optimal taxation, rational expectations and optimal control," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 79-91, May. [Downloadable!] (restricted)
  8. Albert Marcet & Ramon Marimon, 1994. "Recursive Contracts," Economics Working Papers 337, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 1998. [Downloadable!]
    Other versions:
  9. Richard Dennis, 2001. "Pre-commitment, the timeless perspective, and policymaking from behind a veil of uncertainty," Working Papers in Applied Economic Theory 2001-19, Federal Reserve Bank of San Francisco. [Downloadable!]
  10. Alexander L. Wolman, 1999. "Sticky prices, marginal cost, and the behavior of inflation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 29-48. [Downloadable!]
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Cited by:
(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. David M. Arseneau, 2004. "Optimal Inflation in an Open Economy," Econometric Society 2004 North American Summer Meetings 279, Econometric Society. [Downloadable!]
  2. John M. Roberts, 2007. "Learning, Sticky Inflation, and the Sacrifice Ratio," Kiel Working Papers 1365, Kiel Institute for the World Economy. [Downloadable!]
  3. Alan Auerbach & Maurice Obstfeld, 2006. "The Case for Open-Market Purchases in a Liquidity Trap," Center for International and Development Economics Research, Working Paper Series 1051, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
    Other versions:
  4. David M. Arseneau, 2004. "Optimal inflation in an open economy with imperfect competition," Finance and Economics Discussion Series 2004-25, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  5. Robert Amano & Steve Ambler & Nooman Rebei, 2006. "The Macroeconomic Effects of Non-Zero Trend Inflation," Working Papers 06-34, Bank of Canada. [Downloadable!]
    Other versions:
  6. Robert Amano & Kevin Moran & Stephen Murchison & Andrew Rennison, 2007. "Trend Inflation, Wage and Price Rigidities, and Welfare," Cahiers de recherche 0720, CIRPEE. [Downloadable!]
    Other versions:
  7. Jangryoul Kim, 2003. "Welfare evaluation of monetary policy rules in a model with nominal rigidities," Banking and Policy Studies 3-03, Federal Reserve Bank of Minneapolis. [Downloadable!]
  8. Michael Dotsey & Andreas Hornstein, 2007. "Interest rate versus money supply instruments: on the implementation of Markov-perfect optimal monetary policy," Working Papers 07-27, Federal Reserve Bank of Philadelphia. [Downloadable!]
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