Endogenous Price Flexibility and Optimal Monetary Policy
AbstractMuch of the literature on optimal monetary policy uses models in which the degree of nominal price flexibility is exogenous. There are, however, good reasons to suppose that the degree of price flexibility adjusts endogenously to changes in monetary conditions. This paper extends the standard New Keynesian model to incorporate an endogenous degree of price flexibility. The model shows that endo?genising the degree of price flexibility tends to shift optimal monetary policy towards complete inflation stabilisation, even when shocks take the form of cost-push distur?bances. This contrasts with the standard result obtained in models with exogenous price flexibility, which show that optimal monetary policy should allow some degree of inflation volatility in order to stabilise the welfare-relevant output gap.
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Bibliographic InfoPaper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 201007.
Date of creation: 15 Feb 2010
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Welfare; Endogenous Price Flexibility; Optimal Monetary Policy.;
Other versions of this item:
- Senay, Ozge & Sutherland, Alan, 2010. "Endogenous Price Flexibility and Optimal Monetary Policy," SIRE Discussion Papers 2010-16, Scottish Institute for Research in Economics (SIRE).
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-03-20 (All new papers)
- NEP-CBA-2010-03-20 (Central Banking)
- NEP-MAC-2010-03-20 (Macroeconomics)
- NEP-MON-2010-03-20 (Monetary Economics)
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