Abstract: This paper analyzes optimal monetary policy under precommitment in a state-dependent pricing (SDP) environment. Under SDP, monopolistically competitive firms are allowed to endogenously change the timing of price adjustments. I show that this endogenous timing of price adjustment alters the tradeoff and the cost of inflation variation faced by the monetary authority in comparison to t...

How should monetary authorities react to an oil price shock? The New Keynesian literature has concluded that ensuring complete price stability is the optimal thing to do. In contrast, this paper argues that a meaningful trade-off between stabilizing inflation and the welfare relevant output gap arises in a distorted economy once one recognizes (i) that oil (energy) cannot be easily substituted ...

We examine the extent to which monetary policy should respond movements in sectoral inflation rates using a Generalized Taylor model that takes specific account of make-up consumer price index. calibrate for each sector UK microdata. find rule allowing different responses sectors outperforms targeting only aggregate inflation, as does responding core inflation. However, we optimal leads small a...