Staggered Price Setting, Bertrand Competition and Optimal Monetary Policy

Download or read book Staggered Price Setting, Bertrand Competition and Optimal Monetary Policy written by Federico Etro and published by . This book was released on 2014 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: We reconsider the New Keynesian model with staggered price setting when each market is characterized by a small number of firms competing in prices à la Bertrand rather than a continuum of isolated monopolists. Price adjusters change their prices less when there are more firms that do not adjust, creating a natural and strong form of real rigidity. In a DSGE model with Calvo pricing this reduces the level of nominal rigidities needed to generate high reactions of output to monetary shocks. As a consequence, the determinacy region enlarges and the optimal monetary rule under cost push shocks, derived with the linear quadratic approach, becomes less aggressive, and the welfare gains from commitment to the optimal monetary policy decrease.