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Title: State-dependent pricing turns money into a two-edged sword

Author(s): Patrick Minford

Publication Date: December 2020

Keyword(s): Crises, New keynesian, Nominal GDP, price stability, Rational Expectations and State-Dependence

Programme Area(s): Monetary Economics and Fluctuations

Abstract: Strong evidence exists that price/wage durations are dependent on the state of the economy, especially inflation. We embed this dependence in a macro model of the US that otherwise does well in matching the economy's behaviour in the last three decades; it now also matches it over the whole post-war period. This finding implies a major new role for monetary policy: besides controlling inflation it now determines the economy's price stickiness. We find that, when backed by fiscal policy in preventing a ZLB, by targeting nominal GDP monetary policy can achieve high price stability and avoid large cyclical output fluctuations.

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Bibliographic Reference

Minford, P. 2020. 'State-dependent pricing turns money into a two-edged sword'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15551