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Time consistent monetary policy with endogenous price rigidity

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  • Henry E. Siu

Abstract

I characterize time consistent equilibrium in an economy with price rigidity and an optimizing> monetary authority operating under discretion. Firms have the option to increase their frequency> of price change, at a cost, in response to higher inflation. Previous studies, which assume a constant> degree of price rigidity across inflation regimes, find two time consistent equilibria ? one with low> inflation, the other with high inflation. In contrast, when price rigidity is endogenous, the high> inflation equilibrium ceases to exist. Hence, time consistent equilibrium is unique. This result> depends on two features of the analysis: (1) a plausible quantitative specification of the fixed cost> of price change, and (2) the presence of an arbitrarily small cost of inflation that is independent of> price rigidity.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 390.

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Date of creation: 2007
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Handle: RePEc:fip:fedmsr:390

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Keywords: Monetary policy;

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References

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Cited by:
  1. David Arseneau, 2012. "Expectation traps in a new Keynesian open economy model," Economic Theory, Springer, vol. 49(1), pages 81-112, January.
  2. Eric Swanson & Gauti Eggertsson, 2007. "Optimal Time-Consistent Monetary Policy in the New Keynesian Model with Repeated Simultaneous Play," 2007 Meeting Papers 214, Society for Economic Dynamics.
  3. Marco Bonomo & Carlos Carvalho, 2010. "Imperfectly Credible Disinflation under Endogenous Time-Dependent Pricing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(5), pages 799-831, 08.
  4. Orlando Gomes & Diana A. Mendes & Vivaldo M. Mendes & José Sousa Ramos, 2006. "Endogenous Cycles in Optimal Monetary Policywith a Nonlinear Phillips Curve," Working Papers Series 1 ercwp1508, ISCTE-IUL, Business Research Unit (BRU-IUL).
  5. Andreas Schabert, 2005. "Discretionary Policy, Multiple Equilibria, and Monetary Instruments," Tinbergen Institute Discussion Papers 05-098/2, Tinbergen Institute.
  6. Armenter, Roc, 2013. "The perils of nominal targets," Working Papers 14-2, Federal Reserve Bank of Philadelphia.
  7. Schabert, Andreas, 2005. "Discretionary policy, multiple equilibria, and monetary instruments," Working Paper Series 0533, European Central Bank.

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