Optimal Monetary Policy with Relative Price Distortions

2005 ◽  
Vol 95 (1) ◽  
pp. 89-109 ◽  
Author(s):  
Tack Yun
Keyword(s):  
Monetary Policy ◽  
Price Dispersion ◽  
Relative Price ◽  
Price Setting ◽  
Optimal Monetary Policy ◽  
Equilibrium Conditions ◽  
Price Distortion ◽  
Inflation Targets ◽  
Price Distortions ◽  
Initial Price

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.

scholarly journals Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment

2010 ◽  
Vol 2 (2) ◽  
pp. 1-30 ◽  
Author(s):  
Olivier Blanchard ◽  
Jordi Galí
Keyword(s):  
Monetary Policy ◽  
Labor Market ◽  
Labor Markets ◽  
New Keynesian ◽  
Price Setting ◽  
Efficient Allocation ◽  
New Keynesian Model ◽  
Optimal Monetary Policy ◽  
Productivity Shocks ◽  
Keynesian Model

We construct a utility-based model of fluctuations with nominal rigidities and unemployment. We first show that under a standard utility specification, productivity shocks have no effect on unemployment in the constrained efficient allocation. That property is also shown to hold, despite labor market frictions, in the decentralized equilibrium under flexible prices and wages. Inefficient unemployment fluctuations arise when we introduce real-wage rigidities. As a result, in the presence of staggered price setting by firms, the central bank faces a trade-off between inflation and unemployment stabilization, which depends on labor market characteristics. We draw the implications for optimal monetary policy. (JEL E12, E24, E52)

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

2011 ◽  
Vol 3 (2) ◽  
pp. 130-162 ◽  
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)

scholarly journals Why monetary board: Monetary board and endogenic price flexibility

2004 ◽  
Vol 49 (162) ◽  
pp. 175-188
Author(s):  
Tamara Basic
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Optimal Policy ◽  
Flexible Exchange Rate ◽  
Exchange Rate Policy ◽  
Optimal Monetary Policy ◽  
Rate Policy ◽  
Price Flexibility ◽  
The Difference ◽  
Initial Price

The paper presents a model which proves that a unilateral exchange rate fixing, i.e. monetary board, as opposed to certain opinions, is an optimal policy since it increases flexibility of nominal prices, which is the ultimate goal of a flexible exchange rate policy. A suitable calibration of the model shows that the higher the initial price flexibility, the lower the difference needed for "utility increase" in getting the producers to switch from fixed to flexible prices. The results obtained in all cases indicate that exchange rate fixing increases price flexibility, which proves that a unilateral exchange rate fixing, i.e. monetary board, could be an optimal monetary policy.

Optimal Monetary Policy at the Zero Lower Bound

2015 ◽  
Author(s):  
Costas Azariadis ◽  
James Bullard ◽  
Aarti Singh ◽  
Jacek Suda
Keyword(s):  
Monetary Policy ◽  
Lower Bound ◽  
Zero Lower Bound ◽  
Optimal Monetary Policy
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