Optimal Monetary Policy Under Menu Costs - Basil Halperin
We analytically characterize optimal monetary policy in a multisector economy with menu costs and show that inflation and output should move inversely following sectoral shocks. That is, after negative productivity shocks, inflation should be allowed to rise, and vice versa. In a baseline parameterization, optimal policy stabilizes nominal wages. This nominal wage targeting contrasts with inflation targeting, the optimal policy prescribed by the textbook New Keynesian model in which firms are permitted to adjust their prices only randomly and exogenously. The key intuition is that stabilizing inflation causes shocks to spill over across sectors, needlessly increasing the number of firms that must pay the fixed menu cost of price adjustment compared to optimal policy. Finally, we show in a quantitative model that, following a sectoral shock, nominal wage targeting reduces the welfare loss arising from menu costs by 81% compared to inflation targeting.

Microsoft Teams link: (Meeting ID: 377 727 494 462 – Passcode: KM7ZZv)
teams.microsoft.com/l/meetup-join/19%3ameeting_NzM5ODMzOTMtMDEzNC00OTdlLWFlYmYtNThiYzA5NzAzNDUz%40thread.v2/0?context=%7b%22Tid%22%3a%22cc95de1b-97f5-4f93-b4ba-fe68b852cf91%22%2c%22Oid%22%3a%22bd928c81-3467-45ee-a373-26b71940572f%22%7d
Date: 22 January 2024, 14:30 (Monday, 2nd week, Hilary 2024)
Venue: Remote via Microsoft Teams
Speaker: Basil Halperin (MIT)
Organising department: Department of Economics
Organiser: Eva Vivalt (University of Toronto)
Organiser contact email address: gpi-office@philosophy.ox.ac.uk
Hosts: John Firth (University of Oxford, Global Priorities Institute), Eva Vivalt (University of Toronto)
Part of: Global Priorities Institute (GPI) - Seminar Series
Booking required?: Not required
Audience: Public
Editors: Sven Herrmann, Christian Panzer, Bethany McWhinnie