Optimal monetary policy under fairness concerns in pricing

Abstract

This study explores the implications of fairness concerns in pricing for optimal monetary policy. Building on the fair-pricing model of Eyster et al. (2001), it derives a utility-based welfare loss function and identifies two key findings. First, fairness concerns shift the policy objective from stabilizing inflation, as emphasized in New Keynesian models, to minimizing and stabilizing perceived unfairness. Second, the analysis uncovers a novel disinflationary bias under discretionary policy, which contrasts with the inflationary bias widely discussed in the literature.