Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153684
Authors: 
Nakov, Anton
Thomas, Carlos
Year of Publication: 
2010
Series/Report no.: 
ECB Working Paper 1250
Abstract: 
We study optimal monetary policy in a flexible state-dependent pricing framework, in which monopolistic competition and stochastic menu costs are the only distortions. We show analytically that it is optimal to commit to zero inflation in the long run. Moreover, our numerical simulations indicate that the optimal stabilization policy is "price stability". These findings represent a generalization to a state-dependent framework of the same results found for the simple Calvo model with exogenous timing of price adjustment.
Subjects: 
optimal monetary policy
price stability
state-dependent pricing
stochastic menu costs
JEL: 
E31
Document Type: 
Working Paper

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