Discussion paper

DP15551 State-dependent pricing turns money into a two-edged sword

Strong evidence exists that price/wage durations are dependent on the state of the economy, especially inflation. We embed this dependence in a macro model of the US that otherwise does well in matching
the economy's behaviour in the last three decades; it now also matches it over the whole post-war
period. This finding implies a major new role for monetary policy: besides controlling inflation it now
determines the economy's price stickiness. We find that, when backed by fiscal policy in preventing a
ZLB, by targeting nominal GDP monetary policy can achieve high price stability and avoid large cyclical
output fluctuations.

£6.00
Citation

Le, V, P Minford and D Meenagh (eds) (2020), “DP15551 State-dependent pricing turns money into a two-edged sword”, CEPR Press Discussion Paper No. 15551. https://new.cepr.org/publications/dp15551