زمان سیاست های پولی سازگار با استحکام قیمت درون زا

I characterize time consistent equilibrium in an economy with price rigidity and an optimizing monetary authority operating under discretion. Firms have the option to increase their frequency of price change, at a cost, in response to higher inflation. Previous studies, which assume a constant degree of price rigidity across inflation regimes, find two time consistent equilibria—one with low inflation, the other with high inflation. In contrast, when price rigidity is endogenous, the high inflation equilibrium ceases to exist. Hence, time consistent equilibrium is unique. This result depends on two features of the analysis: (1) a plausible quantitative specification of the fixed cost of price change, and (2) the presence of an arbitrarily small cost of inflation that is independent of price rigidity.

Central bank policy is best characterized as being set with discretion: monetary policymakers do not simply implement policy plans determined in the past. So while it is crucial to characterize optimal policy under commitment, it is equally important to understand what outcomes can arise when policymakers act with discretion. Recently, this issue has been studied in the context of dynamic general equilibrium models of the monetary transmission mechanism. These studies maintain two assumptions. The first is lack of commitment on the part of the benevolentpolicymaker. The second is that the degree of price rigidity is independent of the inflationary regime. In these economies, equilibria are generally not unique. Expectation traps arise in which equilibria associated with expectations of low or high inflation become self-fulfilling. 1 Hence, these models rationalize the view that the experience of the U.S. during the 1970s was due to a high inflation expectation trap. Using the methods of Chari and Kehoe [8], Chari et al. [7] demonstrate this multiplicity in a sticky price model in which agents play trigger strategies (see also [4, Section IV]). An important shortcoming, however, is that the play of trigger strategies admits many possible equilibria. 2 Two recent papers—Albanesi et al. [2] and King and Wolman [18]—study discretionary policy when reputational mechanisms are ruled out. These papers show that expectation traps remain; that is, multiplicity does not rely on folk-theorem type reasoning, but is a germane feature of monetary discretion. The intuition can be summarized as follows. Firms are monopolistic and set sticky prices. This provides an incentive for the monetary authority to generate unexpected inflation: since the output of sticky price firms is demand determined, unexpected inflation stimulates output and reduces the monopoly distortion. Costs of realized inflation generate a trade-off, so that the monetary authority produces positive, but finite, inflation. Forward-looking firms account for this when setting prices. If firms expect lowinflation to occur, they set accordingly lowprices. If firms expect high inflation, they set high prices. Accommodation by the monetary authority validates private sector expectations. Hence, accommodation—the hallmark of policy discretion—generates the possibility of multiple equilibria. A problem with this reasoning is that it relies heavily on the degree of price rigidity being exogenous. With sticky prices, a firm’s future price is simply not permitted to adjust for inflation that happens between now and then. Expectations of high inflation lead firms to set high prices now, thus compelling the monetary authority to deliver on those expectations. While assuming exogenously rigid prices is fruitful for monetary business cycle analysis, it seems problematic in formulating an explanation for high inflation episodes. This is particularly true since the assumption is central to generating high inflation. I consider an economy in which the degree of price rigidity is endogenous. The objective is to determine the robustness of the expectation trap result in such a model, absent an appeal to reputational mechanisms. In the face of high inflation, firms can choose to incur a fixed cost to increase their frequency of price change. When the degree of price rigidity is allowed to adjust, the high inflation equilibrium ceases to exist. Time consistent equilibrium is unique. 3 This result depends on: (a) a quantitatively reasonable specification of the fixed cost of price change, and (b) the presence of an arbitrarily small welfare cost of realized inflation that is independent of rigid prices. I show this in two steps. First, I consider a ‘simplified’ model in which realized inflation is costly only when prices are sticky, so that only feature (a) is operational. Two time consistentequilibria exist, one with low inflation, the other with high inflation. For reasonable specifications of the fixed cost of price change, the high inflation equilibrium displays full price flexibility. With full flexibility, the cost–benefit trade-off in inflation disappears and the monetary authority is indifferent across inflation outcomes. Next, I introduce feature (b), a cost of inflation that is present regardless of whether prices are sticky or flexible. This breaks the monetary authority’s indifference at full price flexibility. The high inflation equilibrium is eliminated in quantitatively relevant specifications of the model, so that time consistent equilibrium is unique. Section 2 presents the simplified model, and Section 3 characterizes equilibrium for arbitrary monetary policy. Section 4 details the crucial strategic complementarity in firms’ pricing decisions that is the source of multiplicity, and how this depends on the specification of policy. Sections 5 and 6 characterize Markov perfect equilibrium in which the discretionary monetary authority maximizes private sector welfare. Section 7 discusses the perturbation of the model that eliminates the high inflation equilibrium and discusses robustness of the result. Section 8 concludes.

In this paper I characterize time consistent equilibrium in a model with monetary discretion and an endogenously determined degree of price rigidity. The endogeneity is introduced by allowing firms to determine their frequency of price change; more frequent price change involves incurring a fixed cost. When welfare costs of inflation are present only with sticky prices, there exist two time consistent equilibria: an optimistic equilibrium with low inflation, and a pessimistic equilibrium with high inflation. This is in keeping with previous studies that assume exogenously rigid prices. But for quantitatively reasonable specifications of the fixed cost, the pessimistic equilibrium displays full price flexibility. When an arbitrarily small cost of inflation exists independent of rigid prices, the pessimistic equilibrium is eliminated, and time consistent equilibrium is unique. Finally, though attention has been restricted to Markov perfect equilibrium, the nature of the results is likely to extend to environments in which the monetary authority’s reputation matters. This is because the fragility of pessimistic equilibrium is due to optimizing behavior of private sector agents. Any proposed history of events that entails expectations of high inflation will result in firms opting for flexible as opposed to sticky prices. Again, this eliminates the monetary authority’s welfare trade-off in inflation due to price rigidity, leading to the arguments considered here. 22 Simply put, it seems problematic to formulate a model explaining high inflation equilibria based on sticky prices since, quantitatively, firms would choose not to charge sticky prices.