A Framework for the Analysis of Moderate Inflations

FRB Richmond Working Paper No. 97-4

50 Pages Posted: 19 Nov 2012

See all articles by Marvin Goodfriend

Marvin Goodfriend

Carnegie Mellon University - David A. Tepper School of Business; National Bureau of Economic Research (NBER)

Date Written: March 1, 1997

Abstract

Optimal monetary policy is studied in a model with no contractual restrictions or physical costs of changing prices. Nevertheless, the price level is sticky in a range of markup indeterminacy, and inflation occurs only when employment presses against capacity. Under full information, the monetary authority can exploit price level stickiness to minimize the markup and keep employment at a constrained optimum without inflation. Under uncertainty, negative aggregate demand shocks produce real contractions and positive shocks raise the price level. The monetary authority can raise the likelihood that aggregate demand will maximize employment, but at the cost of higher expected inflation.

Keywords: Optimal Monetary Policy, Inflation, Unemployment

JEL Classification: E3, E4, E5

Suggested Citation

Goodfriend, Marvin, A Framework for the Analysis of Moderate Inflations (March 1, 1997). FRB Richmond Working Paper No. 97-4. Available at SSRN: https://ssrn.com/abstract=2129931 or http://dx.doi.org/10.2139/ssrn.2129931

Marvin Goodfriend (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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