Optimal Monetary Policy with State-Dependent Pricing

31 Pages Posted: 5 Oct 2010

See all articles by Anton Nakov

Anton Nakov

European Central Bank (ECB); CEPR

Carlos Thomas

Banco de España

Multiple version iconThere are 4 versions of this paper

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

Suggested Citation

Nakov, Anton A. and Thomas, Carlos, Optimal Monetary Policy with State-Dependent Pricing (September 23, 2010). ECB Working Paper No. 1250, Available at SSRN: https://ssrn.com/abstract=1681397 or http://dx.doi.org/10.2139/ssrn.1681397

Anton A. Nakov (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

CEPR ( email )

United Kingdom

Carlos Thomas

Banco de España ( email )

Alcala 50
Madrid 28014

HOME PAGE: http://www.bde.es

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