US EditionOptimal Monetary Policy Under Menu Costs
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Optimal Monetary Policy Under Menu Costs
Authors:Daniele Caratelli, U.S. Department of the TreasuryBasil Halperin, Stanford University Abstract: We analytically characterize optimal monetary policy in a multisector economy with menu costs and contrast it with the textbook New Keynesian model based on Calvo pricing. Following a sectoral productivity shock, the textbook model prescribes zero inflation, providing a formal justification for inflation targeting. In contrast, under menu cost…
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