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Optimal Monetary Policy, Endogenous Sticky Prices, and Multiple Equilibria
1Cornell University, LB247@cornell.edu
2Federal Reserve Bank of St. Louis, firstname.lastname@example.org
Citation Information: The B.E. Journal of Macroeconomics. Volume 7, Issue 1, Pages –, ISSN (Online) 1935-1690, DOI: 10.2202/1935-1690.1428, January 2007
- Published Online:
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.