Endogenous time-dependent rules and inflation inertia

Abstract

In this paper, we endogenize fixed price time-dependent rules to examine the output effects of monetary disinflation. We derive the optimal rules in and out of inflationary steady states, and develop a methodology to aggregate individual pricing rules which vary through time. Because of strategic complementarities, we have to solve both problems simultaneously. This allows us to reassess the output costs of monetary disinflations, including aspects such as the roles of the initial level of inflation, and of the degree of strategic complementarity in price. Finally, we relax the strict assumption of pure time-dependent rules by allowing price-setters to re-evaluate their rules at the time disinflation is announced.