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Endogenous price flexibility and optimal monetary policy

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senay_sutherland_oxford_economic_papers.pdf (280.4Kb)
Date
10/2014
Author
Senay, Ozge
Sutherland, Alan
Keywords
HB Economic Theory
BDC
R2C
Metadata
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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 article extends the standard new Keynesian model to incorporate an endogenous degree of price flexibility. The model shows that endogenizing the degree of price flexibility tends to shift optimal monetary policy towards complete inflation stabilization, 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 to stabilize the welfare-relevant output gap.
Citation
Senay , O & Sutherland , A 2014 , ' Endogenous price flexibility and optimal monetary policy ' , Oxford Economic Papers , vol. 66 , no. 4 , pp. 1121-1144 . https://doi.org/10.1093/oep/gpt040
Publication
Oxford Economic Papers
Status
Peer reviewed
DOI
https://doi.org/10.1093/oep/gpt040
ISSN
0030-7653
Type
Journal article
Rights
© 2014. Oxford University Press. All rights reserved. This is a pre-copyedited, author-produced PDF of an article accepted for publication in Oxford Economic Papers following peer review. The version of record Endogenous Price Flexibility and Optimal Monetary Policy Senay, O. & Sutherland, A. 2014 In : Oxford Economic Papers. 66, 4, p. 1121-1144 is available online at: http://oep.oxfordjournals.org/content/66/4/1121
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  • University of St Andrews Research
URI
http://hdl.handle.net/10023/8047

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