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State-dependent pricing turns money into a two-edged sword

Le, Vo Phuong Mai, Meenagh, David and Minford, Anthony 2021. State-dependent pricing turns money into a two-edged sword. [Working Paper]. Cardiff Economics Working Papers.

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Strong evidence exists that price/wage durations are dependent on the state of the economy, especially inflation. We embed this dependence in a macro model of the US that otherwise does well in matching the economy's behaviour in the last three decades; it now also matches it over the whole post-war period. This finding implies a major new role for monetary policy: besides controlling inflation it now determines the economy's price stickiness. We find that, when backed by fiscal policy in preventing a ZLB, by targeting nominal GDP monetary policy can achieve high price stability and avoid large cyclical output fluctuations.

Item Type: Monograph (Working Paper)
Status: Unpublished
Schools: Business (Including Economics)
Subjects: H Social Sciences > HB Economic Theory
Publisher: Cardiff Economics Working Papers
Date of Acceptance: 30 June 2021
Last Modified: 30 Jan 2022 11:52

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