Price setting and the steady-state effects of inflation

• Autores: Miguel Casares Polo
• Localización: Spanish economic review, ISSN 1435-5469, Vol. 6, Nº 4, 2004, págs. 267-289
• Idioma: inglés
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• Resumen

  • This paper examines how price setting plays a key role in explaining the steady-state effects of inflation in a monopolistic competition economy with transactions-facilitating money. Three pricing variants (optimal prices, indexed prices, and unchanged prices) are introduced through a generalization of the Calvo-type setting that allows price indexation. We found that in an economy with less indexed prices, the steady-state negative impact of inflation on output is higher. Regarding welfare analysis, our results support a long-run monetary policy aimed at price stability with a close-to-zero inflation target. This finding is robust to any price setting scenario.