State-dependent pricing and optimal monetary policy

  title={State-dependent pricing and optimal monetary policy},
  author={Denny Lie},
Abstract: This paper analyzes optimal monetary policy under precommitment in a state-dependent pricing (SDP) environment. Under SDP, monopolistically competitive firms are allowed to endogenously change the timing of price adjustments. I show that this endogenous timing of price adjustment alters the tradeoff and the cost of inflation variation faced by the monetary authority in comparison to the standard time-dependent pricing (TDP) assumption. In particular, it is desirable to let inflation… CONTINUE READING


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