Optimal monetary policy responses to relative-price changes

This paper analyzes optimal monetary policy in a sticky price model with Calvo-type staggered price-setting. In the paper, the optimal monetary policy maximizes the expected utility of a representative household without having to rely on a set of linearly approximated equilibrium conditions, given the distortions associated with the staggered price-setting. It shows that the complete stabilization of the price level is optimal in the absence of initial price dispersion, while optimal inflation targets respond to changes in the level of relative price distortion in the presence of initial price dispersion.

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Explaining inflation in the period of quantitative easing in Japan: Relative-price changes, aggregate demand, and monetary policy

Journal of Asian Economics ◽

10.1016/j.asieco.2014.08.001 ◽

2015 ◽

Vol 36 ◽

pp. 72-85 ◽

Cited By ~ 5

Author(s):

Bernd Hayo ◽

Hiroyuki Ono

Keyword(s):

Monetary Policy ◽

Aggregate Demand ◽

Relative Price ◽

Quantitative Easing ◽

Price Changes

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Welfare-Based Optimal Monetary Policy with Unemployment and Sticky Prices: A Linear-Quadratic Framework

American Economic Journal Macroeconomics ◽

10.1257/mac.3.2.130 ◽

2011 ◽

Vol 3 (2) ◽

pp. 130-162 ◽

Cited By ~ 35

Author(s):

Federico Ravenna ◽

Carl E Walsh

Keyword(s):

Monetary Policy ◽

Labor Market ◽

Order Approximation ◽

Sticky Prices ◽

Relative Price ◽

Quadratic Model ◽

Optimal Monetary Policy ◽

Linear Quadratic ◽

Linear Quadratic Model ◽

New Keynesian Models

We derive a linear-quadratic model that is consistent with sticky prices and search and matching frictions in the labor market. We show that the second-order approximation to the welfare of the representative agent depends on inflation and “gaps” that involve current and lagged unemployment. Our approximation makes explicit how welfare costs are generated by the presence of search frictions. These costs are distinct from the costs associated with relative price dispersion and fluctuations in consumption that appear in standard new Keynesian models. We show the labor market structure has important implications for optimal monetary policy. (JEL E24, E31, E52)

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SHOULD THE CENTRAL BANK BE CONCERNED ABOUT HOUSING PRICES?

Macroeconomic Dynamics ◽

10.1017/s1365100510001021 ◽

2012 ◽

Vol 17 (1) ◽

pp. 29-53 ◽

Cited By ~ 8

Author(s):

Karsten Jeske ◽

Zheng Liu

Keyword(s):

Monetary Policy ◽

Housing Prices ◽

Optimal Monetary Policy ◽

Factor Intensity ◽

Optimal Weight ◽

Policy Responses ◽

Expenditure Share ◽

The Asymmetry ◽

Two Sectors ◽

Housing Expenditure

Housing is an important component of the consumption basket. Because both rental prices and goods prices are sticky, the literature suggests that optimal monetary policy should stabilize both types of prices, with the optimal weight on rental inflation proportional to the housing expenditure share. In a two-sector DSGE model with sticky rental prices and goods prices, however, we find that the optimal weight on rental inflation in the Taylor rule is small—much smaller than that implied by the housing expenditure share. We show that the asymmetry in policy responses to rent inflation versus goods inflation stems from the asymmetry in factor intensity between the two sectors.

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