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A framework for the analysis of moderate inflations

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Author Info
Marvin Goodfriend

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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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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 97-04.

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Date of creation: 1997
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Handle: RePEc:fip:fedrwp:97-04

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Keywords: Inflation (Finance)

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  1. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2001. "Optimal monetary policy," Working Papers 01-5, Federal Reserve Bank of Philadelphia. [Downloadable!]
    Other versions:
  2. Jeannine Bailliu & Daniel Garcés & Mark Kruger & Miguel Messmacher, 2003. "Explaining and Forecasting Inflation in Emerging Markets: The Case of Mexico," Working Papers 03-17, Bank of Canada. [Downloadable!]
  3. Gillman, Max & Kejak, Michal, 2005. "Inflation and Balanced-Path Growth with Alternative Payment Mechanisms," Cardiff Economics Working Papers E2005/15, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]
    Other versions:
  4. Robert G. King & Alexander L. Wolman, 1996. "Inflation targeting in a St. Louis model of the 21st century," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 83-107. [Downloadable!]
    Other versions:
  5. Domac, Ilker, 2004. "Explaining and forecasting inflation in Tukey," Policy Research Working Paper Series 3287, The World Bank. [Downloadable!]
  6. O'Reilly, B., 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. [Downloadable!]
  7. Alexander L. Wolman, 2000. "The frequency and costs of individual price adjustments," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-22. [Downloadable!]
    Other versions:
  8. David Turchick & Rubens Penha Cysne, 2008. "On the Consistency of Arbitrary Money-Demand Functions with the Sidrauski and the Shopping-Time Models," Economics Working Papers (Ensaios Economicos da EPGE) 666, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
  9. Marvin Goodfriend & Robert G. King, 2001. "The case for price stability," Working Paper 01-02, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
  10. NUÑEZ AMORTEGUI, Héctor Mauricio, 2005. "Una evaluación de los pronósticos de inflación en Colombia bajo el esquema de inflación objetivo," REVISTA DE ECONOMÍA DEL ROSARIO, UNIVERSIDAD DEL ROSARIO - FACULTAD DE ECONOMÍA. [Downloadable!]
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