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Oligopolistic competition and optimal monetary policy

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  • Faia, Ester

Abstract

The literature has shown that product market frictions and firms dynamic play a crucial role in reconciling standard DSGE with several stylized facts. This paper studies optimal monetary policy in a DSGE model with sticky prices and oligopolistic competition. In this model firms' monopolistic rents induce both intra-temporal and intertemporal time-varying wedges which induce inefficient fluctuations of employment and consumption. The monetary authority faces a trade-off between stabilizing inflation and reducing inefficient fluctuations, which is resolved by using consumer price inflation as a state contingent sale subsidy. An analysis of the welfare gains of alternative rules show that targeting mark-ups and asset prices might improve upon a strict inflation targeting.

Suggested Citation

  • Faia, Ester, 2009. "Oligopolistic competition and optimal monetary policy," Kiel Working Papers 1552, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkwp:1552
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    More about this item

    Keywords

    Product market frictions; oligopolistic competition; optimal monetary policy;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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