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Staggered Price Setting, Bertrand Competition and Optimal Monetary Policy

Author

Listed:
  • Federico Etro

    (Department of Economics, University Of Venice C� Foscari)

  • Lorenza Rossi

    (Department of Economics, University Of Pavia)

Abstract

We reconsider the New Keynesian model with staggered price setting when each market is characterized by a small number of firms competing in prices � la Bertrand rather than a continuum of isolated monopolists. Price adjusters change their prices less when there are more firms that do not adjust, creating a natural and strong form of real rigidity. In a DSGE model with Calvo pricing this reduces the level of nominal rigidities needed to generate high reactions of output to monetary shocks. As a consequence, the determinacy region enlarges and the optimal monetary rule under cost push shocks, derived with the linear quadratic approach, becomes less aggressive, and the welfare gains from commitment to the optimal monetary policy decrease.

Suggested Citation

  • Federico Etro & Lorenza Rossi, 2014. "Staggered Price Setting, Bertrand Competition and Optimal Monetary Policy," Working Papers 2014:10, Department of Economics, University of Venice "Ca' Foscari".
    • Handle: RePEc:ven:wpaper:2014:10
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    Cited by:

    1. Etro, Federico & Rossi, Lorenza, 2015. "New-Keynesian Phillips curve with Bertrand competition and endogenous entry," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 318-340.

    More about this item

    Keywords

    New Keynesian Phillips Curve; Real rigidities; Sticky prices; Optimal monetary policy; Inflation; Endogenous entry;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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