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Oligopolistic competition and optimal monetary policy

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  • Faia, Ester

Abstract

This paper studies optimal monetary policy in a DSGE model with supply side strategic complementarity, as arising from oligopolistic competition, and nominal rigidities. Firms' oligopolistic rents induce inefficient fluctuations through both, intra-temporal and intertemporal time-varying wedges. Optimality requires the use of state contingent inflation taxes to smooth and reduce firms' rents. Hence, under optimal (Ramsey) policy PPI deviates significantly from zero. A comparison of welfare costs for a set of operational rules relatively to the Ramsey plan shows that targeting the output gap, the mark-up and the asset price improves upon a rule with aggressive response to inflation.

Suggested Citation

  • Faia, Ester, 2012. "Oligopolistic competition and optimal monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 36(11), pages 1760-1774.
    • Handle: RePEc:eee:dyncon:v:36:y:2012:i:11:p:1760-1774
    DOI: 10.1016/j.jedc.2012.07.001
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    More about this item

    Keywords

    Product market frictions; Oligopolistic competition; Optimal monetary policy;
    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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