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Optimal Monetary Policy with a Flexible Price-setting Rule

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Nickerson, D. Optimal Monetary Policy with a Flexible Price-setting Rule. Credit and Capital Markets – Kredit und Kapital, 18(3), 289-298. https://doi.org/10.3790/ccm.18.3.289
Nickerson, David "Optimal Monetary Policy with a Flexible Price-setting Rule" Credit and Capital Markets – Kredit und Kapital 18.3, 1985, 289-298. https://doi.org/10.3790/ccm.18.3.289
Nickerson, David (1985): Optimal Monetary Policy with a Flexible Price-setting Rule, in: Credit and Capital Markets – Kredit und Kapital, vol. 18, iss. 3, 289-298, [online] https://doi.org/10.3790/ccm.18.3.289

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Optimal Monetary Policy with a Flexible Price-setting Rule

Nickerson, David

Credit and Capital Markets – Kredit und Kapital, Vol. 18 (1985), Iss. 3 : pp. 289–298

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David Nickerson, Vancouver

References

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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.