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Endogenous nominal rigidities and monetary policy

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  • Kimura, Takeshi
  • Kurozumi, Takushi

Abstract

Recent empirical research finds that the degree of nominal rigidities varies over monetary policy regimes. This implies that monetary policy analysis with exogenously given nominal rigidities is subject to the Lucas critique. We allow firms to choose the probability of price adjustment in a Calvo-style sticky price model, and analyze how this probability changes according to an inflation coefficient of the Taylor rule. The model shows that a more aggressive monetary policy response to inflation makes firms less likely to reset prices and gives the resulting New Keynesian Phillips curve a flatter slope and a smaller disturbance, as observed during the Volcker-Greenspan era. Also, such a policy response can stabilize both inflation and the output gap by exploiting the feedback effects of this policy response on firms' price-setting. These results offer theoretical support for the good policy hypothesis about the Great Moderation.

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  • Kimura, Takeshi & Kurozumi, Takushi, 2010. "Endogenous nominal rigidities and monetary policy," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 1038-1048, November.
  • Handle: RePEc:eee:moneco:v:57:y:2010:i:8:p:1038-1048
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    Cited by:

    1. Watson, Anna, 2016. "Trade openness and inflation: The role of real and nominal price rigidities," Journal of International Money and Finance, Elsevier, vol. 64(C), pages 137-169.
    2. Kurozumi, Takushi & Van Zandweghe, Willem, 2017. "Trend Inflation And Equilibrium Stability: Firm-Specific Versus Homogeneous Labor," Macroeconomic Dynamics, Cambridge University Press, pages 947-981.
    3. Anna Watson, 2010. "The Impact of Trade Integration and Competition on Real and Nominal Price Rigidities: Insights from a New-Keynesian DSGE Model," DEGIT Conference Papers c015_061, DEGIT, Dynamics, Economic Growth, and International Trade.
    4. Sohei Kaihatsu & Mitsuru Katagiri & Noriyuki Shiraki, 2017. "Phillips Curve and Price-Change Distribution under Declining Trend Inflation," Bank of Japan Working Paper Series 17-E-5, Bank of Japan.
    5. Choi, Chi-Young & O'Sullivan, Róisín, 2013. "Heterogeneous response of disaggregate inflation to monetary policy regime change: The role of price stickiness," Journal of Economic Dynamics and Control, Elsevier, vol. 37(9), pages 1814-1832.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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