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Kiel Institute for World Economics Kiel Working Papers, Kiel Institute for World Economics

No 1552:
Oligopolistic Competition and Optimal Monetary Policy

Ester Faia

Abstract: The literature has shown that product market frictions and firms dynamic play a crucial role in reconciling standard DSGE with several stylized facts. This paper studies optimal monetary policy in a DSGE model with sticky prices and oligopolistic competition. In this model firms’ monopolistic rents induce both intra-temporal and intertemporal time-varying wedges which induce inefficient fluctuations of employment and consumption. The monetary authority faces a trade-off between stabilizing inflation and reducing inefficient fluctuations, which is resolved by using consumer price inflation as a state contingent sale subsidy. An analysis of the welfare gains of alternative rules show that targeting mark-ups and asset prices might improve upon a strict inflation targeting

Keywords: product market frictions, oligopolistic competition, optimal monetary policy; (follow links to similar papers)

JEL-Codes: E3,; E5; (follow links to similar papers)

28 pages, September 2009

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