On Thursday, November 1, noon-14 pm, Frank Heinemann, from the TU Berlin will be the speaker of the Research Seminar in Economics. He will present his research paper on "Monetary Policy obeying the Taylor Principle Turns Prices into Strategic Substitutes " at Kaminzimmer (room 202), Boltzmannstraße 20, 14195 Berlin.
Monetary policy affects the degree of strategic complementarity in firms’ pricing decisions if it responds to the aggregate price level. In normal times, when monopolistic competitive firms increase their prices, the central bank raises interest rates, which lowers consumption demand and creates an incentive for firms to reduce their prices. Thereby, monetary policy reduces the degree of strategic complementarities among firms’ pricing decisions and even turns prices into strategic substitutes if the effect of interest rates on demand is sufficiently strong. We show that this condition holds when monetary policy follows the Taylor principle. By contrast, in a liquidity trap where monetary policy is restricted by the zero lower bound, pricing decisions are strategic complements. Our main contribution consists in relating the determinacy and stability of equilibria to strategic substitutability in prices. We discuss the consequences for dynamic adjustment processes and some policy implications.
For further information about the Research Seminar in Economics and its program, please click here.