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Optimal interest rate stabilization in a basic sticky-price model

  • Paustian, Matthias
  • Stoltenberg, Christian

This paper studies optimal monetary policy with the nominal interest rate as the single policy instrument in an economy, where firms set prices in a staggered way without indexation and real money balances contribute separately to households' utility. The optimal deterministic steady state under commitment is the Friedman rule - even if the importance assigned to the utility of money is small relative to consumption and leisure. We approximate the model around the optimal steady state as the long-run policy target. Optimal monetary policy is characterized by stabilization of the nominal interest rate instead of inflation stabilization as the predominant principle.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 32 (2008)
Issue (Month): 10 (October)
Pages: 3166-3191

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Handle: RePEc:eee:dyncon:v:32:y:2008:i:10:p:3166-3191
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