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Main Title: Monetary policy obeying the Taylor principle turns prices into strategic substitutes
Author(s): Cornand, Camille
Heinemann, Frank
Type: Article
Language Code: en
Abstract: Monetary policy affects the degree of strategic complementarity in firms’ pricing decisions if it responds to the aggregate price level. In normal times, when monopolistic competitive firms increase their prices, the central bank raises interest rates, which lowers demand and creates an incentive for firms to reduce their prices. Thereby, monetary policy reduces the degree of strategic complementarities among firms’ pricing decisions and even turns prices into strategic substitutes if the effect of interest rates on demand is sufficiently strong. We show that this condition holds when monetary policy follows the Taylor principle. By contrast, if the equilibrium is indeterminate, because monetary policy violates the Taylor principle, or in a liquidity trap where monetary policy is restricted by the zero lower bound, pricing decisions are strategic complements. We discuss the consequences for dynamic adjustment processes after shocks and some policy implications.
Issue Date: 1-Nov-2019
Date Available: 5-Nov-2019
DDC Class: 330 Wirtschaft
Subject(s): monopolistic competition
monetary policy rule
pricing decisions
strategic complementarity
strategic substitutability
Journal Title: Journal of Economic Behavior & Organization
Publisher: Elsevier
Publisher Place: Amsterdam [u.a.]
Publisher DOI: 10.1016/j.jebo.2019.10.022
EISSN: 1879-1751
ISSN: 0167-2681
Appears in Collections:FG Makroökonomik » Publications

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