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Title:Strategic Complementarities and Optimal Monetary Policy PDF Logo
Authors:Levin, Andrew T.
López-Salido, José David
Yun, Tack
Issue Date:2007
Series/Report no.:Kieler Arbeitspapiere 1355
Abstract:In this paper, we show that strategic complementarities?such as firm-specific factors or quasikinked demand?have crucial implications for the design of monetary policy and for the welfare costs of output and inflation variability. Recent research has mainly used log-linear approximations to analyze the role of these mechanisms in amplifying the real effects of monetary shocks. In contrast, our analysis explicitly considers the nonlinear properties of these mechanisms that are relevant for characterizing the deterministic steady state as well as the second-order approximation of social welfare in the stochastic economy. We demonstrate that firm-specific factors and quasi-kinked demand curves yield markedly different implications for the welfare costs of steady-state inflation and inflation volatility, and we show that these considerations have dramatic consequences in assessing the relative price distortions associated with the Great Inflation of 1965-1979.
Subjects:firm-specific factors
quasi-kinked demand
welfare analysis
JEL:E52
E32
E31
Document Type:Working Paper
Appears in Collections:Publikationen von Forscherinnen und Forschern des IfW
Kieler Arbeitspapiere, IfW

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