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Economic Quarterly

Fall 2001

A Primer on Optimal Monetary Policy with Staggered Price-Setting

Three notions of optimal monetary policy are applied to a model in which firms set their prices for multiple periods. The best steady state inflation rate is slightly positive, but the policy that maximizes present discounted welfare leads in the long run to zero inflation. If commitment is not feasible, a benevolent monetary authority will choose relatively high inflation.

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Lisa Davis (804) 697-8179