Pricing-to-Market and Optimal Interest Rate Policy

descriptionPublicationkeyboard_double_arrow_right Article , Other literature type , Preprint 01 Jan 2014Publisher:Federal Reserve Bank of DallasJournal:Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute Working Papers, volume 2,014

Authors: Cooke, Dudley;

doi: 10.24149/gwp187

Pricing-to-Market and Optimal Interest Rate Policy

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Abstract

I study optimal interest rate policy in a small open economy with consumer search in the product market. When there are search frictions, firms price-to-market, with implications for the design of monetary policy. Country-specific shocks generate deviations from the law of one price for traded goods which monetary policy acts to stabilize by influencing firm markups. However, stabilizing law of one price deviations results in greater fluctuations in output.

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Keywords

interest rates; monetary policy; price, jel: jel:E52, jel: jel:E31, jel: jel:F41

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