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Title: Endogenous Price Flexibility and Optimal Monetary Policy
Authors: Sutherland, Alan
Senay, Ozge
Keywords: welfare
endogenous price flexibility
optimal monetary policy
Issue Date: 2010
Citation: Senay, O. & Sutherland, A. (2010). 'Endogenous Price Flexibility and Optimal Monetary Policy.' Centre for Dynamic Macroeconomic Analysis working paper series ;10/07
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 distur┬Čbances. 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: Postprint
Type: Working or discussion paper
Publication Status: Published
Status: Non peer reviewed
Publisher: Centre for Dynamic Macroeconomic Analysis
Appears in Collections:Economics & Finance Research

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