Optimal Stabilization Policy with Flexible Prices

We construct a dynamic stochastic general equilibrium model to study optimal monetary stabilization policy. Prices are fully flexible and money is essential for trade. Our main result is that if the central bank pursues a long-run price path, thereby controlling inflation expectations, it can improve welfare by stabilizing short-run aggregate shocks. The optimal policy involves smoothing nominal interest rates which effectively smooths consumption across states. Failure to follow a long-run price path makes any stabilization attempt ineffective.

• Publication year

  2005

• Venue

  Social Science Research Network

• Publication date

  2005-12-01

• Fields of study

  Economics

• Identifiers
  DOI 10.2139/ssrn.876558
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• No claims are published for this paper.

• No concepts are published for this paper.

• The Evolution of Public Spending on Higher Education in a Democracy

  2012cited by this paper
• Optimal tax policy when firms are internationally mobile

  2011cited by this paper
• Interest and Prices

  2011cited by this paper
• What Determines Differences in Foreign Bank Efficiency? Australian Evidence

  2010cited by this paper
• Labour Market Institutions and the Personal Distribution of Income in the OECD

  2009cited by this paper
• Visas and work permits: Possible global negotiating initiatives

  2008cited by this paper
• Electoral Uncertainty, Fiscal Policy and Macroeconomic Fluctuations

  2007cited by this paper
• The generalized Stackelberg equilibrium of the all-pay auction with complete information

  2007cited by this paper
• Friedman Meets Hosios: Efficiency in Search Models of Money

  2007cited by this paper
• Money, credit and banking

  2007influential reference
• How Important is Discount Rate Heterogeneity for Wealth Inequality?

  2007cited by this paper
• Nordic dual income taxation of entrepreneurs

  2007cited by this paper
• A random matching theory

  2007cited by this paper
• Constant Savings Rates and Quasi-Arithmetic Population Growth Under Exhaustible Resource Constraints

  2007cited by this paper
• Transfers, Nontraded Goods, and Unemployment: An Analysis of the Keynes-Ohlin Debate

  2007cited by this paper
• State Visits and International Trade

  2007cited by this paper
• Policy-induced internal migration: An empirical investigation of the Canadian case

  2006cited by this paper
• Efficiency Potential and Efficiency Variation in Norwegian Lower Secondary Schools

  2006cited by this paper
• Transparency of Monetary Policy: Theory and Practice

  2006cited by this paper
• What Explains the Variation in Estimates of Labour Supply Elasticities?

  2006cited by this paper
• On the Research Value of Large Games

  2006cited by this paper
• To Go or Not to Go: Emigration from Germany

  2006cited by this paper
• Introducing Time-to-Educate in a Job Search Model

  2006cited by this paper
• Fiscal Federalism and Economic Growth

  2006cited by this paper
• How Fiscal Decentralization Flattens Progressive Taxes

  2006cited by this paper
• Sustainable social spending

  2006cited by this paper
• On the Incentives to Experiment in Federations

  2006cited by this paper
• Do Institutions of Direct Democracy Tame the Leviathan? Swiss Evidence on the Structure of Expenditure for Public Education

  2005cited by this paper
• The Political Economy of Intergenerational Cooperation

  2005cited by this paper
• Tax Competition When Firms Choose Their Organizational Form: Should Tax Loopholes for Multinationals Be Closed?

  2005cited by this paper
• Explaining Conflict in Low-Income Countries: Incomplete Contracting in the Shadow of the Future

  2005cited by this paper
• The Different Extent of Privatisation Proceeds in EU Countries: A Preliminary Explanation Using a Public Choice Approach

  2005cited by this paper
• International Capital Market Integration, Educational Choice and Economic Growth

  2005cited by this paper
• Diversification and Ownership Concentration

  2005cited by this paper
• Tax Effects on Unemployment and the Choice of Educational Type

  2005cited by this paper
• The Three Parties in the Race to the Bottom: Host Governments, Home Governments and Multinational Companies

  2005cited by this paper
• Cross-Border Mergers and Acquisitions: On Revealed Comparative Advantage and Merger Waves

  2005cited by this paper
• The Distribution of Money Balances and the Nonneutrality of Money

  2005cited by this paper
• Severance Pay and the Shadow of the Law: Evidence for West Germany

  2005cited by this paper
• Centralized vs. De-Centralized Multinationals and Taxes

  2005cited by this paper
• Product Market Competition, Profit Sharing and Equilibrium Unemployment

  2005cited by this paper
• Health Values, Preference Inconsistency, and Insurance Demand

  2005cited by this paper
• Is Monetary Policy in the Eurozone Less Effective than in the Us?

  2005cited by this paper
• Young Liberals and Old Conservatives - Inequality, Mobility and Redistribution

  2005cited by this paper
• Social Security and Longevity

  2005cited by this paper
• Advertising, Competition and Entry in Media Industries

  2005cited by this paper
• Survivor Benefits and the Gender Tax Gap in Public Pension Schemes: Observations from Germany

  2005cited by this paper
• Concerns for Equity and the Optimal Co-Payments for Publicly Provided Health Care

  2005cited by this paper
• New Evidence on Fiscal Decentralization and the Size of Government

  2005cited by this paper
• Artificial Time Inconsistency as a Remedy for the Race to the Bottom

  2005cited by this paper
• Gender and Ethnicity - Married Immigrants in Britain

  2005cited by this paper
• INTEREST AND PRICES: FOUNDATIONS OF A THEORY OF MONETARY POLICY

  2005cited by this paper
• Bank Control and the Number of Bank Relations of Japanese Firms

  2005cited by this paper
• Contracting Out Temporary Help Services in Germany

  2005cited by this paper
• Taxation and the Financial Structure of German Outbound FDI

  2005cited by this paper
• Preliminary and Incomplete Please Do Not Quote and Do Not Circulate

  2005cited by this paper
• Tax Effects, Search Unemployment, and the Choice of Educational Type

  2005cited by this paper
• Should You Take a Lump-Sum or Annuitize? Results from Swiss Pension Funds

  2005cited by this paper
• Social Health Insurance - the Major Driver of Unsustainable Fiscal Policy?

  2005cited by this paper
• Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium

  2003influential reference
• Whither Monetary Economics

  2001cited by this paper
• The Science of Monetary Policy: A New Keynesian Perspective

  1999cited by this paper
• Money is memory

  1998cited by this paper
• A Dictum for Monetary Theory

  1998cited by this paper
• A Divisible Search Model of Fiat Money

  1997cited by this paper
• The Role of Countercyclical Monetary Policy

  1996cited by this paper
• Liquidity, loanable funds, and real activity☆

  1992cited by this paper
• Liquidity and interest rates

  1990cited by this paper
• Money in search equilibrium

  1984cited by this paper
• Research Paper Series Globalisation and Labour Markets Boon or Bane for Domestic Employment? Acknowledgements Financial Support from the Leverhulme Trust under Programme Grant F114/bf Is Gratefully Acknowledged. We Are Grateful to International Fragmentation: Boon or Bane for Domestic Employment?

  year unknowncited by this paper
• Federal Reserve Bank of Minneapolis Research Department Staff Report 346 a Unified Framework for Monetary Theory and Policy Analysis *

  year unknowninfluential reference

• Social Norms

  2020cites this paper
• Policy-relevant models for central banks

  2016cites this paper
• The Efficiency of the Friedman Rule in a Monetary Union

  2016cites this paper
• Tenure Profiles and Efficient Separation in a Stochastic Productivity Model

  2014cites this paper
• Measurement Error in Education and Growth Regressions

  2010cites this paper
• Structural Vector Autoregressions With Nonnormal Residuals

  2010cites this paper
• Persistence of Innovation in Dutch Manufacturing: Is It Spurious?

  2010cites this paper
• Corruption and the shadow economy: an empirical analysis

  2010cites this paper
• Monetary Policy with Heterogeneous Collateralized Borrowing

  2009cites this paper
• The savings-inflation puzzle

  2009cites this paper
• MONEY AND NOMINAL BONDS

  2009cites this paper
• Something Out of Nothing? Neoclassical Growth and the 'Trivial' Steady State

  2008cites this paper
• Inflation Expectations and Inflation Uncertainty in the Eurozone: Evidence from Survey Data

  2008cites this paper
• Long persuasion games

  2008cites this paper
• Information, Coordination, and the Industrialization of Countries

  2008cites this paper
• Essays on Monetary Theory and Policy

  2008cites this paper
• The New Keynesian Phillips Curve and the Role of Expectations: Evidence from the Ifo World Economic Survey

  2008cites this paper
• Inflation and Unemployment: The Roles of Goods and Labor Markets Institutions

  2008cites this paper
• The role of fiscal policy in a monetary union:are national automatic stabilizers effective?

  2008cites this paper
• Outsourcing in contests

  2007cites this paper
• Public versus private health care in a national health service.

  2007cites this paper
• Money, credit and banking

  2007cites this paper
• Learning, Structural Instability, and Present Value Calculations

  2007cites this paper
• Elastic Money, Inflation, And Interest Rate Policy

  2007cites this paper
• The Ex Ante Incentive Compatible Core in Exchange Economies With and Without Indivisibilities

  2007cites this paper
• Essays on the financial system and the transmission of monetary policy

  2007cites this paper
• Political Competition and Convergence to Fundamentals: With Application to the Political Business Cycle and the Size of Government

  2006cites this paper
• Bureaucratic corruption and profit tax evasion

  2006cites this paper
• Evaluation of Researchers: A Life Cycle Analysis of German Academic Economists

  2006cites this paper
• Rethinking the Concept of Long-Run Economic Growth

  2006cites this paper
• Voice and Bargaining Power

  2006cites this paper
• Top Incomes and Top Taxes in Germany

  2006cites this paper
• A model of strategic delegation in contests between groups

  2006cites this paper
• Real and Nominal Wage Adjustment in Open Economies

  2006cites this paper
• What are Their Words Worth? Political Plans and Economic Pains of Fiscal Consolidations in New EU Member States

  2006cites this paper
• African-American and White Living Standards in the 19th Century American South: A Biological Comparison

  2006cites this paper
• Extracting Leading Indicators of Bank Fragility from Market Prices - Estonia Focus

  2006cites this paper
• POISSON PROCESSES: AN APPLIED VIEW

  2006cites this paper
• The Transitional Dynamics of Fiscal Policy in Small Open Economies

  2006cites this paper
• FINANCIAL GLOBALIZATION

  2006cites this paper
• “Itô's Lemma” and the Bellman Equation for Poisson Processes: An Applied View

  2006cites this paper
• Risk Selection in Natural Disaster Insurance - the Case of France

  2006cites this paper
• Fiscal Policy, Monopolistic Competition, and Finite Lives

  2006cites this paper
• On human capital formation with exit options: comment and new results

  2006cites this paper
• Macroeconometric Modelling with a Global Perspective

  2006cites this paper
• A Model of Income Insurance and Social Norms

  2006cites this paper
• Efficient Revenue Sharing and Upper Level Governments: Theory and Application to Germany

  2006cites this paper
• Does Money Matter in the ECB Strategy? New Evidence Based on ECB Communication

  2006cites this paper
• Satisfaction with Democracy and the Environment in Western Europe: A Panel Analysis

  2006cites this paper
• Job Security and Work Absence: Evidence from a Natural Experiment

  2006cites this paper
• On the Size of the Winning Set in the Presence of Interest Groups

  2006cites this paper
• Globalisation and the Mix of Wage and Profit Taxes

  2006cites this paper
• Rent-Seeking Competition from State Coffers: A Calibrated DSGE Model of the Euro Area

  2006cites this paper
• Asset Ownership and Foreign-Market Entry

  2006cites this paper
• Cross-Racial Envy and Underinvestment in South Africa

  2006cites this paper
• Optimal Taxation and Social Insurance in a Lifetime Perspective

  2006cites this paper
• Business Cycle Dynamics of a New Keynesian Overlapping Generations Model with Progressive Income Taxation

  2006cites this paper
• The Role of Fiscal Policy in a Monetary Union: Are National Automatic Stabilizers Effective?

  2006cites this paper
• Does Financial Integration Spur Economic Growth? New Evidence from the First Era of Financial Globalization

  2006cites this paper
• Regional Effects on Employer-Provided Training: Evidence from Apprenticeship Training in Switzerland

  2006cites this paper
• Political Parties and Network Formation

  2006cites this paper
• Economic, Demographic and Political Determinants of Pollution Reassessed: A Sensitivity Analysis

  2006cites this paper
• Optimal Policy Towards Families with Different Amounts of Social Capital, in the Presence of Asymmetric Information and Stochastic Fertility

  2006cites this paper
• Public-Private Partnership and Schooling Outcomes Across Countries

  2006cites this paper
• Major Provisions of Labour Contracts and their Theoretical Coherence

  2006cites this paper
• What Are Their Words Worth?: The Political Plans and Economic Pains of Fiscal Consolidations in the New EU Member States

  2006cites this paper
• A Reappraisal of the Border Effect on Relative Price Volatility

  2006cites this paper
• Reciprocity and Emotions When Reciprocators Know Each Other

  2006cites this paper
• Negative Reciprocity and the Interaction of Emotions and Fairness Norms

  2005cites this paper
• Optimum taxation of life annuities

  2005cites this paper
• The Structure of Worker Compensation in Brazil, With a Comparison to France and the United States ∗

  2005cites this paper