Article ID Journal Published Year Pages File Type
5098927 Journal of Economic Dynamics and Control 2012 15 Pages PDF
Abstract
This paper studies optimal monetary policy in a DSGE model with supply side strategic complementarity, as arising from oligopolistic competition, and nominal rigidities. Firms' oligopolistic rents induce inefficient fluctuations through both, intra-temporal and intertemporal time-varying wedges. Optimality requires the use of state contingent inflation taxes to smooth and reduce firms' rents. Hence, under optimal (Ramsey) policy PPI deviates significantly from zero. A comparison of welfare costs for a set of operational rules relatively to the Ramsey plan shows that targeting the output gap, the mark-up and the asset price improves upon a rule with aggressive response to inflation.
Related Topics
Physical Sciences and Engineering Mathematics Control and Optimization
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