Monetary policy obeying the Taylor principle turns prices into strategic substitutes

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dc.contributor.authorCornand, Camille
dc.contributor.authorHeinemann, Frank
dc.date.accessioned2019-11-05T14:40:21Z
dc.date.available2019-11-05T14:40:21Z
dc.date.issued2019-11-01
dc.description.abstractMonetary 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.en
dc.identifier.eissn1879-1751
dc.identifier.issn0167-2681
dc.identifier.urihttps://depositonce.tu-berlin.de/handle/11303/10245
dc.identifier.urihttp://dx.doi.org/10.14279/depositonce-9207
dc.language.isoenen
dc.rights.urihttps://creativecommons.org/licenses/by-nc-nd/4.0/en
dc.subject.ddc330 Wirtschaftde
dc.subject.othermonopolistic competitionen
dc.subject.othermonetary policy ruleen
dc.subject.otherpricing decisionsen
dc.subject.otherstrategic complementarityen
dc.subject.otherstrategic substitutabilityen
dc.titleMonetary policy obeying the Taylor principle turns prices into strategic substitutesen
dc.typeArticleen
dc.type.versionacceptedVersionen
dcterms.bibliographicCitation.doi10.1016/j.jebo.2019.10.022en
dcterms.bibliographicCitation.journaltitleJournal of Economic Behavior & Organizationen
dcterms.bibliographicCitation.originalpublishernameElsevieren
dcterms.bibliographicCitation.originalpublisherplaceAmsterdam [u.a.]en
tub.accessrights.dnbfreeen
tub.affiliationFak. 7 Wirtschaft und Management::Inst. Volkswirtschaftslehre und Wirtschaftsrecht (IVWR)::FG Makroökonomikde
tub.affiliation.facultyFak. 7 Wirtschaft und Managementde
tub.affiliation.groupFG Makroökonomikde
tub.affiliation.instituteInst. Volkswirtschaftslehre und Wirtschaftsrecht (IVWR)de
tub.publisher.universityorinstitutionTechnische Universität Berlinen

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