Events

Author:

• Charles LEUNG
  City University of Hong Kong

We argue that nominal rents for at least one form of capital, offices, are at least as rigid as the nominal prices and wages. We build a closed economy NNS model with two types of capital, offices and business capital, in order to investigate how office rent rigidity affects the design of the optimal monetary policy. Our findings suggest that an interest rate rule that reacts only to office rent inflation achieves levels of welfare that are remarkably close to the Ramsey optimal policy. We also find that when both price and wage rigidities exist, an interest rate rule that reacts only to office rent inflation outperforms interest rate rules that react to either price or wage inflation, regardless of whether the office rents are rigid.