State-dependent pricing turns money into a two-edged sword: a new role for monetary policy

Le, Vo Phuong Mai ORCID: https://orcid.org/0000-0003-3374-9694, Meenagh, David ORCID: https://orcid.org/0000-0002-9930-7947 and Minford, Patrick ORCID: https://orcid.org/0000-0003-2499-935X 2021. State-dependent pricing turns money into a two-edged sword: a new role for monetary policy. Journal of International Money and Finance 119 , 102496. 10.1016/j.jimonfin.2021.102496

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Abstract

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:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics) Advanced Research Computing @ Cardiff (ARCCA)
Publisher:	Elsevier
ISSN:	0261-5606
Date of First Compliant Deposit:	20 September 2021
Date of Acceptance:	5 September 2021
Last Modified:	07 May 2023 06:07
URI:	https://orca.cardiff.ac.uk/id/eprint/144280

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