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Abstract

The paper proposes a monetary model with nominal rigidities that differs from the conventional New Keynesian model in that firms set pricing policies instead of price levels. In response to permanent or highly persistent monetary policy shocks this model generates the empirically observed slow (inertial) and prolonged (persistent) reaction of the inflation rate, and also the recession which typically accompanies moderate disinflations. The reason is that firms respond to such shocks mostly through achange in the long-run or inflation updating component of their pricing policies. With staggered pricing policies this takes time to be reflected in aggregate inflation.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 232.

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Date of creation: Oct 2003
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Handle: RePEc:chb:bcchwp:232

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This paper has been announced in the following NEP Reports:

• NEP-ALL-2003-11-03 (All new papers)
• NEP-MFD-2003-11-03 (Microfinance)
• NEP-MON-2003-11-03 (Monetary Economics)

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Cited by:

1. Jaromir Benes & Tibor Hledik & Michael Kumhof & David Vavra, 2005. "An Economy in Transition and DSGE: What the Czech National Bank’s New Projection Model Needs," Working Papers 2005/12, Czech National Bank, Research Department.
2. Kolver Hernandez, 2006. "State-Dependent Nominal Rigidities & Disinflation Programs in Small Open Economies," Working Papers 06-13, University of Delaware, Department of Economics.
3. Michael Kumhof, 2004. "Inflation Inertia- THe Role of Multiple, Interacting Pricing Rigidities," Working Papers 182004, Hong Kong Institute for Monetary Research.
4. Minford, Patrick & Peel, David, 2004. "Calvo Contracts: A Critique," CEPR Discussion Papers 4288, C.E.P.R. Discussion Papers.
5. Douglas Laxton & Andrew Berg & Philippe D Karam, 2006. "A Practical Model-Based Approach to Monetary Policy Analysis-Overview," IMF Working Papers 06/80, International Monetary Fund.
6. Kolver Hernandez, 2004. "State-Dependent Nominal Rigidities & Disinflation Programs in Small Open Economies," Macroeconomics 0411021, EconWPA.
7. Le, Vo Phuong Mai & Minford, Patrick, 2007. "Optimising Indexation Arrangements under Calvo Contracts and their Implications for Monetary Policy," CEPR Discussion Papers 6325, C.E.P.R. Discussion Papers.
   
   • Le, Vo Phuong Mai & Minford, Patrick, 2007. "Optimising indexation arrangements under Calvo contracts and their implications for monetary policy," Cardiff Economics Working Papers E2007/7, Cardiff University, Cardiff Business School, Economics Section.

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