Ramsey Monetary Policy with Capital Accumulation and Nominal Rigidities
AbstractRecent literature on the design of optimal monetary policy has shown that deviations from price stability are small whenever prices are sticky. This paper reconsiders this issue by introducing capital accumulation in the model. Optimal monetary policy in this set-up implies small deviations from price stability. The monetary authority optimally uses inflation as an explicit tax on monopolistic profits to reduce the price mark-up across states. Variable mark-up is achieved in this set-up since the share of investment demand over output varies across states and in response to TFP shocks.
Keywordsoptimal monetary policy, capital accumulation, nominal rigidities
JEL classificationE0, E4, E5