A Primer on Optimal Monetary Policy with Staggered Price-Setting
FRB Richmond Economic Quarterly, Vol. 87, No. 4, Fall 2001, pp. 27-52
26 Pages Posted: 30 Nov 2012
Date Written: 2001
Three notions of optimal monetary policy are applied to a model in which firms set their prices for multiple periods. The best steady state inflation rate is slightly positive, but the policy that maximizes present discounted welfare leads in the long run to zero inflation. If commitment is not feasible, a benevolent monetary authority will choose relatively high inflation.
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