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Optimal Monetary Policy in an Optimizing Stochastic Dynamic Model with Sticky Prices

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Michael Gail ()

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Abstract

Recently macroeconomic researchers have begun studying models of optimal monetary policy within the Real Business Cycle (RBC) framework. A standard RBC model is augmented by New Keynesian elements like sticky prices and monopolistically competitive firms. The monetary authority acts as a social planner maximizing the utility of a representative agent while at the same time taking care of the optimal price setting behavior of the firms via an implementation constraint. King/Wolman (1999) analyze the outcome of such a model with respect to the appropriate monetary policy of the central bank. They conclude that the central bank achieves a complete stabilization of the price level. Inflation is not only constant at the steady state but also through time. It is shown that this very special result does not hold under alternative preference specifications that allow for a richer set of substitution effects between consumption and labor.

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Publisher Info
Paper provided by Universität Siegen, Fachbereich Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht in its series Volkswirtschaftliche Diskussionsbeitraege with number 87-00.

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Length: 38 pages
Date of creation: May 2000
Date of revision: 15 May 2001
Handle: RePEc:sie:siegen:87-00

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Web page: http://www.uni-siegen.de/fb5/vwl/research/diskussionsbeitraege/

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Related research
Keywords: Monetary Policy Rules; New Neoclassical Synthesis; Sticky Prices; Real Business Cycle;

Find related papers by JEL classification:
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:

References listed on IDEAS
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  1. Michael Woodford, 2001. "Inflation Stabilization and Welfare," NBER Working Papers 8071, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1997. "State-dependent pricing and the dynamics of business cycles," Working Paper 97-02, Federal Reserve Bank of Richmond. [Downloadable!]
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    Other versions:
  6. Kim, Jinill & Kim, Sunghyun Henry, 2003. "Spurious welfare reversals in international business cycle models," Journal of International Economics, Elsevier, vol. 60(2), pages 471-500, August. [Downloadable!] (restricted)
    Other versions:
  7. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February. [Downloadable!] (restricted)
  8. Robert J. Barro & David B. Gordon, 1984. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  9. Dale Henderson & Jinill Kim, 1999. "Exact Utilities under Alternative Monetary Rules in a Simple Macro Model with Optimizing Agents," International Tax and Public Finance, Springer, vol. 6(4), pages 507-535, November. [Downloadable!] (restricted)
    Other versions:
  10. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing And The General Equilibrium Dynamics Of Money And Output," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 655-690, May. [Downloadable!] (restricted)
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    Other versions:
  13. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June. [Downloadable!] (restricted)
    Other versions:
  14. Robert King & Alexander L. Wolman, 1999. "What Should the Monetary Authority Do When Prices Are Sticky?," NBER Chapters, in: Monetary Policy Rules, pages 349-404 National Bureau of Economic Research, Inc. [Downloadable!]
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    Other versions:
  16. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
  17. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June. [Downloadable!] (restricted)
    Other versions:
  18. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June. [Downloadable!] (restricted)
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