Faculty of Economics and Business Administration Publications Database

Oligopolistic Competition and Optimal Monetary Policy

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Volume: 36
Number: 11
Pages: 1760 - 1774
Month: November
ISSN-Print: 0165-1889
Link External Source: Online Version
Year: 2012
Keywords: Product Market Frictions; Oligopolistic Competition; Optimal Monetary Policy
Abstract: This paper studies optimal monetary policy in a DSGE model with supply side strategic complementarity, as arising from oligopolistic competition, and nominal rigidities. Firms'' oligopolistic rents induce inefficient fluctuations through both, intra-temporal and intertemporal time-varying wedges. Optimality requires the use of state contingent inflation taxes to smooth and reduce firms'' rents. Hence, under optimal (Ramsey) policy PPI deviates significantly from zero. A comparison of welfare costs for a set of operational rules relatively to the Ramsey plan shows that targeting the output gap, the mark-up and the asset price improves upon a rule with aggressive response to inflation.
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