Working Paper: CEPR ID: DP4082
Authors: Fabrice Collard; Harris Dellas
Abstract: We evaluate the case for perfect price (inflation) stabilization in a New Keynesian (NNS) model that includes capital accumulation, a variety of shocks, a monetary and an imperfect competition distortion. In such a model, price rigidity may provide the monetary authorities with an opportunity to improve upon the inefficient flexible price equilibrium via the suitable cyclical manipulation of real marginal costs. We find that such an opportunity is of limited value. With only the imperfect competition friction present (in the ?cashless? version of the model), inflation variability is costly independent of the level of capital adjustment costs, the degree of price rigidity, the size of mark-ups, the degree of risk aversion and the type of the shock. A small amount of inflation variability may become desirable when prices are fairly flexible and capital adjustment costs low if the model includes both frictions.
Keywords: distortions; inflation stabilization; investment; price rigidity
JEL Codes: E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inflation variability (E31) | welfare (I38) |
| presence of investment (E22) | case for inflation stability (E31) |
| monopolistic competition + monetary distortions (E19) | inflation variability becomes welfare-improving (E31) |
| capital adjustment costs + price rigidity (E31) | inflation variability becomes welfare-improving (E31) |