A BEJM Topics article.

Abstract

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.

Submitted: March 16, 2006 · Accepted: January 12, 2007 · Published: January 24, 2007

Recommended Citation

Barseghyan, Levon and DiCecio, Riccardo (2007) "Optimal Monetary Policy, Endogenous Sticky Prices, and Multiple Equilibria," The B.E. Journal of Macroeconomics: Vol. 7 : Iss. 1 (Topics), Article 8.
DOI: 10.2202/1935-1690.1428
Available at: http://www.bepress.com/bejm/vol7/iss1/art8