Optimal monetary policy, endogenous sticky prices and multiplicity of equilibria
AbstractWe analyze optimal discretionary monetary policy in an endogenous sticky prices model. Similar models with exogenous sticky prices can deliver multiple equilibria. This is a necessary condition for the occurrence of expectation traps (when private agents’ expectations determine the equilibrium level of inflation). In our model, sticky price firms are allowed to switch to flexible pricing by paying a random cost. For plausible parametrizations, our model has a unique low-inflation equilibrium. With endogenous sticky prices, the monetary authority does not validate high-inflation expectations and deviates to the Friedman rule.
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Bibliographic InfoPaper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2005-036.
Date of creation: 2007
Date of revision:
Publication status: Published in Topics in Macroeconomics, January 2007, 7(1), Article 8
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-09-29 (All new papers)
- NEP-CBA-2005-09-29 (Central Banking)
- NEP-MAC-2005-09-29 (Macroeconomics)
- NEP-MON-2005-09-29 (Monetary Economics)
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