Optimal Monetary Policy with State-Dependent Pricing
31 Pages Posted: 5 Oct 2010
Date Written: September 23, 2010
We study optimal monetary policy in a flexible state-dependent pricing framework, in which monopolistic competition and stochastic menu costs are the only distortions. We show analytically that it is optimal to commit to zero inflation in the long run. Moreover, our numerical simulations indicate that the optimal stabilization policy is "price stability". These findings represent a generalization to a state-dependent framework of the same results found for the simple Calvo model with exogenous timing of price adjustment.
Keywords: optimal monetary policy, price stability, stochastic menu costs, state-dependent pricing
JEL Classification: E31
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