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Optimal monetary policy under Calvo pricing with Bertrand competition

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Optimal monetary policy under Calvo pricing with Bertrand competition. / Etro, F.; Rossi, L.
In: Journal of Macroeconomics, Vol. 45, 30.09.2015, p. 423-440.

Research output: Contribution to Journal/MagazineJournal articlepeer-review

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Etro F, Rossi L. Optimal monetary policy under Calvo pricing with Bertrand competition. Journal of Macroeconomics. 2015 Sept 30;45:423-440. Epub 2015 Jul 17. doi: 10.1016/j.jmacro.2015.06.004

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Etro, F. ; Rossi, L. / Optimal monetary policy under Calvo pricing with Bertrand competition. In: Journal of Macroeconomics. 2015 ; Vol. 45. pp. 423-440.

Bibtex

@article{167408a9a5a14235917c366706bc5098,
title = "Optimal monetary policy under Calvo pricing with Bertrand competition",
abstract = "We consider a NK model characterized by a small and fixed number of firms competing in prices {\`a} la Bertrand and we study the implications for monetary policy under both exogenous and endogenous market concentration. We find that the implied NKPC has a lower slope compared to a standard NK model with atomistic firms, and the determinacy region enlarges assuming a standard Taylor rule. We characterize the impact of competition on the optimal monetary rules within the linear-quadratic approach of Rotemberg-Woodford. The optimal monetary rule requires a less aggressive reaction to inflationary shocks compared to monopolistic competition, but an increase in competition, due to either an increase in substitutability between the goods or in the number of firms, makes it optimal to adopt a more aggressive reaction in front of inflationary shocks. Finally, more competition increases the gains from commitment. {\textcopyright} 2015 Elsevier Inc.",
keywords = "Bertrand competition, Market concentration, New Keynesian Phillips Curve, Optimal monetary policy, Staggered prices",
author = "F. Etro and L. Rossi",
year = "2015",
month = sep,
day = "30",
doi = "10.1016/j.jmacro.2015.06.004",
language = "English",
volume = "45",
pages = "423--440",
journal = "Journal of Macroeconomics",
issn = "0164-0704",
publisher = "Elsevier BV",

}

RIS

TY - JOUR

T1 - Optimal monetary policy under Calvo pricing with Bertrand competition

AU - Etro, F.

AU - Rossi, L.

PY - 2015/9/30

Y1 - 2015/9/30

N2 - We consider a NK model characterized by a small and fixed number of firms competing in prices à la Bertrand and we study the implications for monetary policy under both exogenous and endogenous market concentration. We find that the implied NKPC has a lower slope compared to a standard NK model with atomistic firms, and the determinacy region enlarges assuming a standard Taylor rule. We characterize the impact of competition on the optimal monetary rules within the linear-quadratic approach of Rotemberg-Woodford. The optimal monetary rule requires a less aggressive reaction to inflationary shocks compared to monopolistic competition, but an increase in competition, due to either an increase in substitutability between the goods or in the number of firms, makes it optimal to adopt a more aggressive reaction in front of inflationary shocks. Finally, more competition increases the gains from commitment. © 2015 Elsevier Inc.

AB - We consider a NK model characterized by a small and fixed number of firms competing in prices à la Bertrand and we study the implications for monetary policy under both exogenous and endogenous market concentration. We find that the implied NKPC has a lower slope compared to a standard NK model with atomistic firms, and the determinacy region enlarges assuming a standard Taylor rule. We characterize the impact of competition on the optimal monetary rules within the linear-quadratic approach of Rotemberg-Woodford. The optimal monetary rule requires a less aggressive reaction to inflationary shocks compared to monopolistic competition, but an increase in competition, due to either an increase in substitutability between the goods or in the number of firms, makes it optimal to adopt a more aggressive reaction in front of inflationary shocks. Finally, more competition increases the gains from commitment. © 2015 Elsevier Inc.

KW - Bertrand competition

KW - Market concentration

KW - New Keynesian Phillips Curve

KW - Optimal monetary policy

KW - Staggered prices

U2 - 10.1016/j.jmacro.2015.06.004

DO - 10.1016/j.jmacro.2015.06.004

M3 - Journal article

VL - 45

SP - 423

EP - 440

JO - Journal of Macroeconomics

JF - Journal of Macroeconomics

SN - 0164-0704

ER -