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Oligopolistic Competition and Optimal Monetary Policy

  • Ester Faia

The literature has shown that product market frictions and firms dynamic play a crucial role in reconciling standard DSGE with several stylized facts. This paper studies optimal monetary policy in a DSGE model with sticky prices and oligopolistic competition. In this model firms’ monopolistic rents induce both intra-temporal and intertemporal time-varying wedges which induce inefficient fluctuations of employment and consumption. The monetary authority faces a trade-off between stabilizing inflation and reducing inefficient fluctuations, which is resolved by using consumer price inflation as a state contingent sale subsidy. An analysis of the welfare gains of alternative rules show that targeting mark-ups and asset prices might improve upon a strict inflation targeting

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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1552.

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Length: 28 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:kie:kieliw:1552
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