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Optimal Monetary Policy in an Optimizing Stochastic Dynamic Model with Sticky Prices

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Abstract

Recently macroeconomic researchers have begun studying models of optimal monetary policy within the Real Business Cycle (RBC) framework. A standard RBC model is augmented by New Keynesian elements like sticky prices and monopolistically competitive firms. The monetary authority acts as a social planner maximizing the utility of a representative agent while at the same time taking care of the optimal price setting behavior of the firms via an implementation constraint. King/Wolman (1999) analyze the outcome of such a model with respect to the appropriate monetary policy of the central bank. They conclude that the central bank achieves a complete stabilization of the price level. Inflation is not only constant at the steady state but also through time. It is shown that this very special result does not hold under alternative preference specifications that allow for a richer set of substitution effects between consumption and labor.

Suggested Citation

  • Michael Gail, 2000. "Optimal Monetary Policy in an Optimizing Stochastic Dynamic Model with Sticky Prices," Volkswirtschaftliche Diskussionsbeiträge 87-00, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht, revised 15 May 2001.
  • Handle: RePEc:sie:siegen:87-00
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    Keywords

    Monetary Policy Rules; New Neoclassical Synthesis; Sticky Prices; Real Business Cycle;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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