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Optimal inflation, monetary integration, and asymmetric sticky prices

Paczos, Wojtek 2020. Optimal inflation, monetary integration, and asymmetric sticky prices. Oxford Economic Papers 72 (3) , pp. 710-730. 10.1093/oep/gpaa008
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Abstract

This paper explores the optimal rate of trend inflation in open economies with and without a monetary union, accounting for empirically observed differences in the degree of price stickiness across countries. In a closed economy, the optimal inflation rate is negative to offset the markup caused by imperfect competition. In an open economy there is a ‘beggar-thy-neighbour’ incentive and the optimal inflation is positive. Monetary union is globally welfare improving because it removes this externality. In both setups, as price stickiness increases, the degree of price dispersion increases, and the optimal inflation rate tends towards zero. Gains from monetary integration are higher for economies with more flexible prices.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HB Economic Theory
Publisher: Oxford University Press (OUP)
ISSN: 0030-7653
Date of First Compliant Deposit: 5 March 2020
Date of Acceptance: 4 March 2020
Last Modified: 25 Nov 2020 23:23
URI: http://orca.cf.ac.uk/id/eprint/130137

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