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Please use this identifier to cite or link to this item: http://hdl.handle.net/10023/2240
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Title: Endogenous price flexibility and optimal monetary policy
Authors: Senay, Ozge
Sutherland, Alan
Keywords: Welfare
Endogenous price flexibility
Optimal monetary policy
HB Economic Theory
Issue Date: Nov-2010
Citation: Senay , O & Sutherland , A 2010 ' Endogenous price flexibility and optimal monetary policy ' Centre for Dynamic Macroeconomic Analysis, Working Paper , no. 1007 .
Series/Report no.: Centre for Dynamic Macroeconomic Analysis, Working Paper
Abstract: Much of the literature on optimal monetary policy uses models in which the degree of nominal price flexibility is exogenous. There are, however, good reasons to suppose that the degree of price flexibility adjusts endogenously to changes in monetary conditions. This paper extends the standard New Keynesian model to incorporate an endogenous degree of price flexibility. The model shows that endogenising the degree of price flexibility tends to shift optimal monetary policy towards complete inflation stabilisation, even when shocks take the form of cost-push disturbances. This contrasts with the standard result obtained in models with exogenous price flexibility, which show that optimal monetary policy should allow some degree of inflation volatility in order to stabilise the welfare-relevant output gap.
Version: Preprint
URI: http://hdl.handle.net/10023/2240
http://www.st-andrews.ac.uk/cdma/papers.html#WP
Type: Working or discussion paper
Appears in Collections:University of St Andrews Research
Economics & Finance Research



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