We 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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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number
2005-036.
Length: Date of creation: 2007 Date of revision: Publication status: Published in Topics in Macroeconomics, January 2007, 7(1), Article 8 Handle: RePEc:fip:fedlwp:2005-036
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.:
Stefania Albanesi & V.V. Chari & Lawrence J. Christiano, .
"Expectation Traps and Monetary Policy,"
Working Papers
198, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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