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Title:Optimal stabilization policy with flexible prices PDF Logo
Authors:Berentsen, Aleksander
Waller, Christopher Jude
Issue Date:2005
Series/Report no.:CESifo working papers 1638
Abstract:We construct a dynamic stochastic general equilibrium model to study optimal monetary stabilization policy. Prices are fully flexible and money is essential for trade. Our main result is that if the central bank pursues a long-run price path, thereby controlling inflation expectations, it can improve welfare by stabilizing short-run aggregate shocks. The optimal policy involves smoothing nominal interest rates which effectively smooths consumption across states. Failure to follow a long-run price path makes any stabilization attempt ineffective.
JEL:E5
E4
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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