Alternative monetary policy rules in an imperfectly competitive DSGE model with asymmetric price adjustment

Abstract

In this paper we study optimal central bank interest rate policy, and compare it to interest rate rules, such as the Wicksell (1898), Fisher (1919) and Taylor (1993) rules, in an imperfectly competitive DSGE model of aggregate fluctuations. We demonstrate that in versions of the model with full price and wage adjustment, or staggered price-setting, the optimal policy rule is the Fisher rule of absolute inflation stabilization. We also analyze a version of the model with exogenous inflation shocks and asymmetric price adjustment, in which the “divine coincidence” does not apply. In this case, the optimal monetary policy rule takes the form of a Taylor rule, the parameters of which depend on the structural and policy parameters of the model.