AbstractWe evaluate the case for perfect price (inflation) stabilization in a New Keynesian (NNS) model that includes capital accumulation, a variety of shocks, a monetary and an imperfect competition distortion. In such a model, price rigidity may provide the monetary authorities with an opportunity to improve upon the ineÂ±cient flexible price equilibrium via the suitable cyclical manipulation of real marginal costs. We find that such an opportunity is of limited value. With only the imperfect competition friction present (in the â€cashlessâ€ version of the model), inflation variability is costly independent of the level of capital adjustment costs, the degree of price rigidity, the size of markups, the degree of risk aversion and the type of the shock. A small amount of inflation variability may become desirable when prices are fairly flexible and capital adjustment costs low if the model includes both frictions
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 97.
Date of creation: 11 Aug 2004
Date of revision:
monetary policy; welfare;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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- Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2005. "Price- and wage- inflation targeting: variations on a theme by Erceg, Henderson, and Levin," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 181-215.
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