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A Framework for the Analysis of Moderate Inflations, Working Paper 97-04

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A Framework for the Analysis of Moderate Inflations, Working Paper 97-04

DATE: March 1995

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ABSTRACT: Optimal monetary policy is studied in a model with no contractual restrictions or physical costs of changing prices. Nevertheless, the price level is sticky in a range of markup indeterminacy, and inflation occurs only when employment presses against capacity. Under full information, the monetary authority can exploit price level stickiness to minimize the markup and keep employment at a constrained optimum without inflation. Under uncertainty, negative aggregate demand shocks produce real contractions and positive shocks raise the price level. The monetary authority can raise the likelihood that aggregate demand will maximize employment, but at the cost of higher expected inflation.

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Goodfriend, Marvin. "A Framework for the Analysis of Moderate Inflations, Working Paper 97-04," Working Papers (Federal Reserve Bank of Richmond) (March 1995). https://fraser.stlouisfed.org/title/3942/item/477072, accessed on April 19, 2024.

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NOTE: This paper was prepared for the March 1995 Swiss National Bank Conference on "Rules versus Discretion in Monetary Policy." It is forthcoming in the Journal of Monetary Economics.

PUBLISHER: Federal Reserve Bank of Richmond

PLACE: Richmond

DIGITAL COPY SOURCE: Federal Reserve Bank of Richmond

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