Template-Type: ReDIF-Paper 1.0
Author-Name: Peter Karadi
Author-X-Name-First: Peter
Author-X-Name-Last: Karadi
Author-Name: Anton Nakov
Author-X-Name-First: Anton
Author-X-Name-Last: Nakov
Author-Name: Galo Nuno Barrau
Author-X-Name-First: Galo Nuno
Author-X-Name-Last: Barrau
Author-Name: Ernesto Pasten
Author-X-Name-First: Ernesto
Author-X-Name-Last: Pasten
Author-Name: Dominik Thaler
Author-X-Name-First: Dominik
Author-X-Name-Last: Thaler
Title: Strike while the iron is hot: optimal monetary policy with a nonlinear Phillips curve
Abstract: We study the Ramsey optimal monetary policy within the Golosov and Lucas (2007) state-dependent pricing framework. The model provides microfoundations for a nonlinear Phillips curve: the sensitivity of inflation to activity increases after large shocks due to an endogenous rise in the frequency of price changes, as observed during the recent inflation surge. In response to large cost-push shocks, optimal policy leverages the lower sacrifice ratio to reduce inflation and stabilize the frequency of price adjustments. At the same time, when facing total factor productivity shocks, an efficient disturbance, the optimal policy commits to strict price stability, similar to the prescription in the standard Calvo (1983) model.
Creation-Date: 2024-08
File-URL: https://www.bis.org/publ/work1203.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1203.htm
File-Format: text/html
Number: 1203
Keywords: state-dependent pricing, large shocks, nonlinear Phillips curve, optimal monetary policy
Classification-JEL: E31, E32, E52
Handle: RePEc:bis:biswps:1203