Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/334928 
Year of Publication: 
2025
Series/Report no.: 
ECB Working Paper No. 3068
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
We characterize optimal monetary policy under state-dependent pricing. The framework gives rise to nonlinear inflation dynamics: The flexibility of the price level increases after large shocks due to an endogenous rise in the frequency of price changes. In response to large cost-push shocks, optimal policy leverages the lower sacrifice ratio to curb inflation. When faced with total factor productivity shocks, an efficient disturbance, the optimal policy commits to strict price stability. The optimal long-run inflation rate is just above zero.
Subjects: 
State-dependent pricing
large shocks
nonlinear Phillips curve
optimal monetary policy
inflation
monetary policy
economic model
prices
report
JEL: 
E31
E32
E52
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-7379-3
Document Type: 
Working Paper

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