DP2757 Price Stability as a Nash Equilibrium in Monetary Open-Economy Models
|Author(s):||Pierpaolo Benigno, Gianluca Benigno|
|Publication Date:||April 2001|
|Keyword(s):||Nash Equilibrium, Open Economy, Optimal Monetary Policy, Price Stability|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2757|
A two-country dynamic general-equilibrium model with imperfect competition and price stickiness is considered. This work shows the conditions under which price stability can implement the flexible-price allocation as a Nash equilibrium. This is possible if and only if both countries maintain a certain positive degree of monopolistic competition. In such equilibrium, the monetary policymakers have no incentive to surprise price setters ex post.