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Optimal Interest Rate Stabilization in a Basic Sticky-Price Model

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  • Matthias Paustian
  • Christian Stoltenberg

Abstract

This paper studies optimal monetary policy with the nominal interest rate as the single policy instrument in an economy, where firms set prices in a staggered way without indexation and real money balances contribute separately to households' utility. The optimal deterministic steady state under commitment is the Friedman rule - even if the importance assigned to the utility of money is small relative to consumption and leisure. We approximate the model around the optimal steady state as the long-run policy target. Optimal monetary policy is characterized by stabilization of the nominal interest rate instead of inflation stabilization as the predominant principle.

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File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2006-072.pdf
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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2006-072.

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Length: 53 pages
Date of creation: Oct 2006
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2006-072

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Related research

Keywords: Optimal monetary policy; commitment; timeless perspective; optimal steady state; staggered price setting; monetary friction; Friedman's rule;

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References

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  1. Bernardino Adao, 2000. "Gaps and Triangles," Econometric Society World Congress 2000 Contributed Papers 1904, Econometric Society.
  2. Roberto M. Billi & Klaus Adam, 2004. "Optimal Monetary Policy under Commitment with a Zero Bound on Nominal Interest Rates," Computing in Economics and Finance 2004 67, Society for Computational Economics.
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  19. Javier Andrés & J. David López-Salido & Javier Vallés, 2001. "Money in an Estimated Business Cycle Model of the Euro Area," Banco de Espa�a Working Papers 0121, Banco de Espa�a.
  20. Alexander L. Wolman, 2001. "A primer on optimal monetary policy with staggered price-setting," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 27-52.
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  22. Michael T. Kiley, 1999. "Partial adjustment and staggered price setting," Finance and Economics Discussion Series 1999-01, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Airaudo, Marco & Cardani, Roberta & Lansing, Kevin J., 2013. "Monetary policy and asset prices with belief-driven fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1453-1478.

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