Optimal fiscal and monetary policy in customer markets
By: David M. Arseneau and Sanjay K. Chugh.
Contributors: Chugh, Sanjay K.; Board of Governors of the Federal Reserve System (U.S.)
Series: International finance discussion papers -- no. 919; International finance discussion papers (Online) -- no. 919.
Publisher: Federal Reserve Board
Published: 2008
Place of publication: Washington, D.C
Language: eng
Format: Electronic resource
Description: "A growing body of evidence suggests that ongoing relationships between consumers and firms may be important for understanding price dynamics.  We investigate whether the existence of such customer relationships has important consequences for the conduct of both long-run and short-run policy.  Our central result is that when consumers and firms are engaged in long-term relationships, the optimal rate of price inflation volatility is very low even though all prices are completely flexible.  This finding is in contrast to those obtained in first-generation Ramsey models of optimal fiscal and monetary policy, which are based on Walrasian markets.  Echoing the basic intuition of models based on sticky prices, unanticipated inflation in our environment causes a type of relative price distortion across markets.  Such distortions stem from fundamental trading frictions that give rise to long-lived customer relationships and makes pursuing inflation stability optimal"--Federal Reserve Board web site.
Notes: Title from PDF file as viewed on 2/11/2008.

Includes bibliographical references.

Also available in print.

System requirements: Adobe Acrobat Reader.

Mode of access: World Wide Web.