Electronic Resource
Berkeley, Calif.
:
Berkeley Electronic Press (now: De Gruyter)
The @B.E. journal of macroeconomics
7.2007, 1, art8
ISSN:
1555-0486
Source:
Berkeley Electronic Press Academic Journals
Topics:
Economics
Notes:
We analyze optimal discretionary monetary policy in an endogenous sticky prices model. Similar models with exogenous sticky prices can deliver multiple equilibria. This is a necessary condition for the occurrence of expectation traps (when private agents' expectations determine the equilibrium level of inflation). In our model, sticky-price firms are allowed to switch to flexible pricing by paying a random cost. For plausible parametrizations, our model has a unique low-inflation equilibrium. With endogenous sticky prices, the monetary authority does not validate high-inflation expectations and deviates to the Friedman rule.
Type of Medium:
Electronic Resource
URL:
http://www.bepress.com/bejm/vol7/iss1/art8
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