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Oligopolistic Competition and Optimal Monetary Policy

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Author Info
Ester Faia

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Abstract

The literature has shown that product market frictions and firms dynamic play a crucial role in reconciling standard DSGE with several stylized facts. This paper studies optimal monetary policy in a DSGE model with sticky prices and oligopolistic competition. In this model firms’ monopolistic rents induce both intra-temporal and intertemporal time-varying wedges which induce inefficient fluctuations of employment and consumption. The monetary authority faces a trade-off between stabilizing inflation and reducing inefficient fluctuations, which is resolved by using consumer price inflation as a state contingent sale subsidy. An analysis of the welfare gains of alternative rules show that targeting mark-ups and asset prices might improve upon a strict inflation targeting

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File URL: http://www.ifw-members.ifw-kiel.de/publications/oligopolistic-competition-and-optimal-monetary-policy-1/kwp-1552
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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1552.

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Length: 28 pages
Date of creation: Sep 2009
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Handle: RePEc:kie:kieliw:1552

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Related research
Keywords: product market frictions; oligopolistic competition; optimal monetary policy;

Find related papers by JEL classification:
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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