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In a plain-vanilla New Keynesian model with two-period staggered price-setting, discretionary monetary policy leads to multiple equilibria. Complementarity between the pricing decisions of forward-looking firms underlies the multiplicity, which is intrinsically dynamic in nature. At each point in time, the discretionary monetary authority optimally accommodates the level of predetermined prices when setting the money supply because it is concerned solely about real activity. Hence, if other firms set a high price in the current period, an individual firm will optimally choose a high price because it knows that the monetary authority next period will accommodate with a high money supply. Under commitment, the mechanism generating complementarity is absent: the monetary authority commits not to respond to future predetermined prices. Multiple equilibria also arise in other similar contexts where (i) a policymaker cannot commit, and (ii) forward-looking agents determine a state variable to which future policy respond. JEL Klassifikation: E5, E61, D78
This paper examines whether an exogenous anticipated monetary shock causes real economic effects, i.e. whether anticipated money is neutral. A major finding is that an anticipated monetary shock can in fact be massively non-neutral in the shortrun, if the economic environment is characterized by strategic complementarity. If the environment is characterized by strategic substitutability, anticipated monetary shocks are largely neutral.
This paper analyses two reasons why inflation may interfere with price adjustment so as to create inefficiencies in resource allocation at low rates of inflation. The first argument is that the higher the rate of inflation the lower the likelihood that downward nominal rigidities are binding (the Tobin argument) which implies a non-linear Phillips-curve. The second argument is that low inflation strengthens nominal price rigidities and thus impairs the flexibility of the price system resulting in a less efficient resource allocation. It is argued that inflation can be too low from a welfare point of view due to the presence of nominal rigidities, but the quantitative importance is an open question.