“Optimal Monetary Policywith Relative Price Distortions” by Tack YUN
Department of Economics University of Southern California
This paper analyzes optimal monetary policy in a sticky price model with Calvo-type staggered price-setting. In this paper, the optimal monetary policy maximizes the expected utility of a representative household without having to rely on a set of linearly approximated equilibrium conditions, given the distortions associated with the staggered price-setting. Then, it shows that the complete stabilization of the price level is optimal in the absence of initial price dispersion, while optimal inflation targets respond to changes in the level of relative price distortion in the presence of initial price dispersion.