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RAMSEY MONETARY POLICY WITH CAPITAL ACCUMULATION AND NOMINAL RIGIDITIES

Published online by Cambridge University Press:  01 April 2008

ESTER FAIA
ESTER FAIA*
Affiliation:
Universitat Pompeu Fabra
*
Address correspondence to: Ester Faia, Department of Economics, Universitat Pompeu Fabra, Ramon Trias Fargas 25-27, 08005, Barcelona, Spain; e-mail: ester.faia@upf.edu.
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Abstract

Recent literature on the design of optimal monetary policy has shown that deviations from price stability are small whenever prices are sticky. This paper reconsiders this issue by introducing capital accumulation in the model. Optimal monetary policy in this setup implies small deviations from price stability. The monetary authority optimally uses inflation as an explicit tax on monopolistic profits to reduce the price markup across states. Variable markup is achieved in this setup because the share of investment demand over output varies across states and in response to TFP shocks.

Keywords

Optimal Monetary PolicyCapital AccumulationNominal Rigidities
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 12 , Supplement S1: Dynamic Macroeconomic Theory , April 2008 , pp. 90 - 99
Copyright
Copyright © Cambridge University Press 2008

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