Working Paper

Pricing-to-market and optimal interest rate policy

Abstract: I study optimal interest rate policy in a small open economy with consumer search in the product market. When there are search frictions, firms price-to-market, with implications for the design of monetary policy. Country-specific shocks generate deviations from the law of one price for traded goods which monetary policy acts to stabilize by influencing firm markups. However, stabilizing law of one price deviations results in greater fluctuations in output.

Keywords: interest rates; monetary policy; price;

JEL Classification: E31; E52; F41;

https://doi.org/10.24149/gwp187

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Globalization Institute Working Papers

Publication Date: 2014-08-01

Number: 187