Kiel Working Papers, Kiel Institute for World Economics
No 1629:
Price Bargaining, the Persistence Puzzle, and Monetary Policy
Dennis Wesselbaum
Abstract: In the recent New Keynesian literature a standard
assumption is that the price for which an intermediate good is sold to the
final good firm is equal to the marginal costs of the intermediate good
firm. However, there is empirical evidence that this need not to hold. This
paper introduces price bargaining into an otherwise standard New Keynesian
DSGE model and show that this model performs reasonably well in replicating
the observed persistence values. We further discuss the role of those
product market imperfections for monetary policy and find a trade-off
between stabilizing intermediate or final good inflation. In addition, the
Ramsey optimal monetary policy can be approximated reasonably well with a
Taylor-type interest rate rule with weights on both inflation rates and
output
Keywords: Inflation and Output Persistence, Monetary Policy, Price Bargaining; (follow links to similar papers)
JEL-Codes: E31,; E52,; L10; (follow links to similar papers)
29 pages, June 2010
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