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Optimal monetary policy under fairness concerns in pricing

Author

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  • Shirota, Toyoichiro

Abstract

This study explores the implications of fairness concerns in pricing for optimal monetary policy. Building on the fair-pricing model of Eyster et al. (2001), it derives a utility-based welfare loss function and identifies two key findings. First, fairness concerns shift the policy objective from stabilizing inflation, as emphasized in New Keynesian models, to minimizing and stabilizing perceived unfairness. Second, the analysis uncovers a novel disinflationary bias under discretionary policy, which contrasts with the inflationary bias widely discussed in the literature.

Suggested Citation

  • Shirota, Toyoichiro, 2025. "Optimal monetary policy under fairness concerns in pricing," Economics Letters, Elsevier, vol. 247(C).
    • Handle: RePEc:eee:ecolet:v:247:y:2025:i:c:s0165176524006244
    DOI: 10.1016/j.econlet.2024.112140
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    References listed on IDEAS

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    1. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(4), pages 1169-1189.
    2. Erik Eyster & Kristóf Madarász & Pascal Michaillat, 2021. "Pricing Under Fairness Concerns," Journal of the European Economic Association, European Economic Association, vol. 19(3), pages 1853-1898.
    3. Frey, Bruno S. & Pommerehne, Werner W., 1993. "On the fairness of pricing -- An empirical survey among the general population," Journal of Economic Behavior & Organization, Elsevier, vol. 20(3), pages 295-307, April.
    4. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-741, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Fairness concerns; Disinflationary bias; Optimal monetary policy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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