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Pricing-to-market and optimal interest rate policy

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  • Dudley Cooke

Abstract

I study optimal interest rate policy in a small open economy with consumer search in the product market. When there are search frictions, firms price-to-market, with implications for the design of monetary policy. Country-specific shocks generate deviations from the law of one price for traded goods which monetary policy acts to stabilize by influencing firm markups. However, stabilizing law of one price deviations results in greater fluctuations in output.

Suggested Citation

  • Dudley Cooke, 2014. "Pricing-to-market and optimal interest rate policy," Globalization Institute Working Papers 187, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddgw:187
    DOI: 10.24149/gwp187
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    interest rates; monetary policy; price;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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