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Strike while the Iron is Hot: Optimal Monetary Policy under State-Dependent Pricing

Author

Listed:
  • Karadi, Peter
  • Nakov, Anton
  • Nuño, Galo
  • Pasten, Ernesto
  • Thaler, Dominik

Abstract

We characterize optimal monetary policy under state-dependent pricing. The framework gives rise to nonlinear inflation dynamics: The flexibility of the price level increases after large shocks due to an endogenous rise in the frequency of price changes. In response to large cost-push shocks, optimal policy leverages the lower sacrifice ratio to curb inflation. When faced with total factor productivity shocks, an efficient disturbance, the optimal policy commits to strict price stability. The optimal long-run inflation rate is just above zero.

Suggested Citation

  • Karadi, Peter & Nakov, Anton & Nuño, Galo & Pasten, Ernesto & Thaler, Dominik, 2024. "Strike while the Iron is Hot: Optimal Monetary Policy under State-Dependent Pricing," CEPR Discussion Papers 19339, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19339
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    1. is not listed on IDEAS
    2. Hugh Montag & Daniel Villar Vallenas, 2025. "Post-Pandemic Price Flexibility in the U.S.: Evidence and Implications for Price Setting Models," Finance and Economics Discussion Series 2025-024, Board of Governors of the Federal Reserve System (U.S.).
    3. Eduardo Gutiérrez & Alari Paulus & Alex Grimaud & Daniel Enderle & Erwan Gautier & Cristina Conflitti & Ludmila Fadejeva & Valentin Jouvanceau & Jean-Oliver Menz & Pavlo Petroulas, 2026. "Consumer Price Stickiness in the Euro Area During an Inflation Surge," Working Papers 1559, Barcelona School of Economics.
    4. Cameron Haas & Mateo Hoyos & Emiliano Libman & Guilherme K. Martins & Arslan Razmi, 2025. "Monetary Shocks and Inflation: Global Evidence from Trilemma-Based Identification," Working Papers DTE 650, CIDE, División de Economía.
    5. Hess T. Chung & Callum J. Jones & Antoine Lepetit & Fernando M. Martin, 2025. "Implications of Inflation Dynamics for Monetary Policy Strategies," Finance and Economics Discussion Series 2025-072, Board of Governors of the Federal Reserve System (U.S.).
    6. Hashmat Khan & Sergio Lago Alves, 2025. "Are New Keynesian Models Useful When Trend Inflation is Not Very Low?," Carleton Economic Papers 25-01, Carleton University, Department of Economics.
    7. Andrejs Zlobins, 2025. "Monetary Policy Transmission in the Euro Area: Is this Time Different? Chapter I: Lags and Strength," Working Papers 2025/01, Latvijas Banka.
    8. Gregory Phelan & Thomas Kohler & Jean-Paul L'Huillier & Maximilian Weiss, 2025. "Why Do Supply Disruptions Lead to Inflation?," Department of Economics Working Papers 2025_104, Department of Economics, Williams College.
    9. Bobeica, Elena & Holton, Sarah & Huber, Florian & Martínez Hernández, Catalina, 2025. "Beware of large shocks! A non-parametric structural inflation model," Working Paper Series 3052, European Central Bank.
    10. Danila Ovechkin, 2026. "Estimation and forecasting with a Nonlinear Phillips Curve based on heterogeneous sensitivity between economic activity and CPI components," Bank of Russia Working Paper Series wps161, Bank of Russia.
    11. Mishel Ghassibe & Anton Nakov, 2025. "Business Cycles with Pricing Cascades," Working Papers 1525, Barcelona School of Economics.
    12. Pablo Cuba-Borda & Jean-Paul L'Huillier, 2025. "Inflation is a Supply Phenomenon," Working Papers 137, Brandeis University, Department of Economics and International Business School.
    13. Kristin Forbes & Jongrim Ha & M. Ayhan Kose, 2026. "Heaven or Earth? The Evolving Role of Global Shocks for Domestic Monetary Policy," NBER Working Papers 34806, National Bureau of Economic Research, Inc.
    14. Marya Nema & Anna Novak & Evgenia Fedorova & Andrei Shulgin, 2026. "Factors Impacting Price Revision by Firms: Evidence from Microdata," Russian Journal of Money and Finance, Bank of Russia, vol. 85(1), pages 3-34, March.
    15. Karadi, Peter & Nakov, Anton & Nuño, Galo & Pasten, Ernesto & Thaler, Dominik, 2025. "Why monetary policy should crack down harder during high inflation," Research Bulletin, European Central Bank, vol. 130.

    More about this item

    Keywords

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    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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