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

Le, Vo Phuong Mai, Meenagh, David and Minford, Patrick 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: 30 May 2022 07:50
URI: https://orca.cardiff.ac.uk/id/eprint/144280

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