Optimal Monetary Policy with a Flexible Price-setting Rule
JOURNAL ARTICLE
Cite JOURNAL ARTICLE
Style
Format
Optimal Monetary Policy with a Flexible Price-setting Rule
Credit and Capital Markets – Kredit und Kapital, Vol. 18 (1985), Iss. 3 : pp. 289–298
Additional Information
Article Details
Author Details
David Nickerson, Vancouver
References
-
Blinder, A. and Fischer, S.: “Inventories, Rational Expectations and the Business Cycle,” Journal of Monetary Economics, November 1981, 4, 277 – 304.
Google Scholar -
Fethke, G. and Policano, A.: “Labor Contracts, Informational Discrepancies and the Role of Monetary Policy,” Journal of Macroeconomics, Winter 1979, 1, 1-18.
Google Scholar -
Fethke, G. and Policano, A.: “Cooperative Responses by Public and Private Agents to Aggregate Demand and Supply Disturbances,” Economica, May 1981, 155 – 171.
Google Scholar -
Fischer, S.: “Long-Term Contracts, Rational Expectations and the Optimal Money Supply Rule,” Journal of Political Economy, February 1977, 85, 191 – 205.
Google Scholar -
Frydman, R.: “Sluggish Price Adjustments and the Effectiveness of Monetary Policy Under Rational Expectations,” Journal of Money, Credit, and Banking, February 1981, 13, 94 – 101.
Google Scholar -
Gordon, R. J.: “Recent Developments in the Theory of Inflation and Unemployment,” Journal of Monetary Economics, February 1976, 2, 185 – 219.
Google Scholar -
Gordon, R. J.: “The Theory of Domestic Inflation,” American Economic Review, February 1977, 67, 128 -134.
Google Scholar -
Graham, D. and Weintraub, E. R.: “Costless Information: A Limiting Assumption?,” Discussion Paper, Duke University, 1972.
Google Scholar -
Lucas, R. E.: “Some International Evidence on Output-Inflation Trade-Offs,” American Economic Review, June 1973, 63, 326 – 334.
Google Scholar -
Lucas, R. E.: “An Equilibrium Model of the Business Cycle,” Journal of Political Economy, December 1975, 83, 1113 – 1144.
Google Scholar -
McCallum, B.: “Price-Level Stickiness and the Feasibility of Monetary Stabilization Policy with Rational Expectations,” Journal of Political Economy, June 1977, 85, 627 – 634.
Google Scholar -
McCallum, B.: “Price Level Adjustments and the Rational Expectations Approach to Macroeconomic Stabilization Policy,” Journal of Money, Credit, and Banking, November 1978, 10, 418 – 436.
Google Scholar -
McCallum, B.: “A Monetary Policy Ineffectiveness Result in a Model with
Google Scholar -
a Predetermined Price Level,” Economics Letters, 1979, 3, 1-4.
Google Scholar -
McCallum, B.: “Rational Expectations and Macroeconomic Stabilization Policy: An Overview,” Journal of Money, Credit, and Banking, November 1980, 12, Part 2, 716 – 746.
Google Scholar -
Modigliani, F.: “The Monetarist Controversy, or Should We Forsake Stabilization Policies?”, American Economic Review, March 1977, 67, 1-19.
Google Scholar -
Nickerson, D.: “A Theorem on Policy Neutrality,” European Economic Review, forthcoming, 1985.
Google Scholar -
Nickerson, D.: “The Neutrality of Systematic Monetary Policy in Models with a Disequilibrium Price Level,” Economics Letters, January 1984, 14, 1 – 8.
Google Scholar -
Sargent, T. and Wallace, N.: “Rational Expectations, the Optimal Monetary Instrument and the Optimal Money Supply Rule,” Journal of Political Economy, April 1975, 83, 241 – 254.
Google Scholar
Abstract
Optimal Monetary Policy with a Flexible Price-setting Rule
The neutrality of systematic monetary policy is examined in a representative macroeconomic model featuring a flexible price-setting rule that encompasses both an equilibrium price, as found in Sargent and Wallace (1975) and two-period price rigidity, as found in Fischer (1977), Phelps and Taylor (1977) and others, as special cases. Systematic monetary policy is shown to influence real output for a continuum of non-equilibrium prices arbitrarily close to the equilibrium price, indicating that monetary policy may have a stabilizing role in an economy with almost complete price flexibility. An optimal monetary policy which minimizes both output and price variance is derived and shown to have an impact on output that is linearly decreasing in a measure of price flexibility. The parameters of this policy are independent of the measure of price flexibility, implying a potentially significant saving in information costs to the monetary authority.