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A framework for the analysis of moderate inflations

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  • Marvin Goodfriend

Abstract

Optimal monetary policy is studied in a model with no contractual restrictions or physical costs of changing prices. Nevertheless, the price level is sticky in a range of markup indeterminacy, and inflation occurs only when employment presses against capacity. Under full information, the monetary authority can exploit price level stickiness to minimize the markup and keep employment at a constrained optimum without inflation. Under uncertainty, negative aggregate demand shocks produce real contractions and positive shocks raise the price level. The monetary authority can raise the likelihood that aggregate demand will maximize employment, but at the cost of higher expected inflation.

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  • Marvin Goodfriend, 1997. "A framework for the analysis of moderate inflations," Working Paper 97-04, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:97-04
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    Cited by:

    1. Marvin Goodfriend & Robert G. King, 2001. "The Case for Price Stability," NBER Working Papers 8423, National Bureau of Economic Research, Inc.
    2. Rotemberg, Julio J. & Woodford, Michael, 1999. "The cyclical behavior of prices and costs," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 16, pages 1051-1135, Elsevier.
    3. Gillman, Max & Otto, Glenn, 2003. "Money demand in a banking time economy," HWWA Discussion Papers 254, Hamburg Institute of International Economics (HWWA).
    4. Alimi, R. Santos, 2012. "The Quantity Theory of Money and Its Long Run Implications: Empirical Evidence from Nigeria," MPRA Paper 49598, University Library of Munich, Germany.
    5. Ariff, Mohamed & Chung, Tin-fah & M., Shamsher, 2012. "Money supply, interest rate, liquidity and share prices: A test of their linkage," Global Finance Journal, Elsevier, vol. 23(3), pages 202-220.
    6. Robert G. King & Alexander L. Wolman, 2013. "Inflation Targeting in a St. Louis Model of the 21st Century," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 543-574.
    7. Chung, Tin-fah & Ariff, M., 2016. "A test of the linkage among money supply, liquidity and share prices in Asia," Japan and the World Economy, Elsevier, vol. 39(C), pages 48-61.
    8. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2003. "Optimal Monetary Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(4), pages 825-860.
    9. International Monetary Fund, 2016. "Colombia: Selected Issues," IMF Staff Country Reports 2016/134, International Monetary Fund.
    10. Brian O'Reilly, 1998. "The Benefits of Low Inflation: Taking Shock "A nickel ain't worth a dime any more" [Yogi Berra]," Technical Reports 83, Bank of Canada.
    11. Hicham Bennouna, 2015. "A Mark-Up Model of Inflation for Morocco," International Journal of Economics and Financial Issues, Econjournals, vol. 5(1), pages 281-287.
    12. Cysne, Rubens Penha & Turchick, David, 2009. "On the integrability of money-demand functions by the Sidrauski and the shopping-time models," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1555-1562, September.
    13. Jeannine Bailliu & Daniel Garcés & Mark Kruger & Miguel Messmacher, 2003. "Explaining and Forecasting Inflation in Emerging Markets: The Case of Mexico," Staff Working Papers 03-17, Bank of Canada.
    14. Max Gillman & Michal Kejak, 2005. "Inflation and Balanced-Path Growth with Alternative Payment Mechanisms," Economic Journal, Royal Economic Society, vol. 115(500), pages 247-270, January.
    15. Cysne, Rubens Penha & Turchick, David, 2008. "On the consistency of arbitrary money-demand functions with the Sidrauski and the shopping-time models," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 666, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    16. Tesfaselassie, Mewael F., 2016. "The impact of disembodied technological progress on working hours," Kiel Working Papers 2026, Kiel Institute for the World Economy (IfW Kiel).
    17. Héctor Mauricio Nunez Amortegui, 2005. "Una evaluación de los pronósticos de inflación en Colombia bajo el esquema de inflación objetivo," Revista de Economía del Rosario, Universidad del Rosario, December.
    18. Alexander L. Wolman, 2007. "The frequency and costs of individual price adjustment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(6), pages 531-552.
    19. Abbas Khandan & Seyyed Mahmood Hosseini, 2016. "Determinants of Inflation: A Case Study of Iran," Applied Economics and Finance, Redfame publishing, vol. 3(4), pages 95-102, November.
    20. Stefan Reppen, 2015. "Finding Obstacles to Growth: Is Infrastructure a Binding Constraint on African Light-Manufacturing Firms?," International Journal of Economics and Financial Issues, Econjournals, vol. 5(3), pages 820-832.
    21. Wu, Yangru & Zhang, Junxi, 2000. "Monopolistic competition, increasing returns to scale, and the welfare costs of inflation," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 417-440, October.

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    Inflation (Finance);

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