Working Paper: CEPR ID: DP2757
Authors: Gianluca Benigno; Pierpaolo Benigno
Abstract: A two-country dynamic general-equilibrium model with imperfect competition and price stickiness is considered. This work shows the conditions under which price stability can implement the flexible-price allocation as a Nash equilibrium. This is possible if and only if both countries maintain a certain positive degree of monopolistic competition. In such equilibrium, the monetary policymakers have no incentive to surprise price setters ex post.
Keywords: Nash equilibrium; open economy; optimal monetary policy; price stability
JEL Codes: E52; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| price stability (E31) | Nash equilibrium (C72) |
| monopolistic competition (L12) | price stability (E31) |
| price stability (E31) | economic fluctuations (E32) |
| monetary policymakers stabilize domestic price levels (E63) | stable economic environment (E60) |
| price stability (E31) | flexible-price allocation (D61) |
| positive degree of monopolistic competition (D42) | price stability (E31) |