Working Paper

Oligopolistic Competition and Optimal Monetary Policy


  • Faia
  • E.
Publication Date

The literature has shown that product market frictions and firms dynamic play a crucial role in

reconciling standard DSGE with several stylized facts. This paper studies optimal monetary policy in a DSGE model with sticky prices and oligopolistic competition. In this model firms’ monopolistic rents induce both intra-temporal and intertemporal time-varying wedges which induce inefficient fluctuations of employment and consumption. The monetary authority faces a trade-off between stabilizing inflation and reducing inefficient fluctuations, which is resolved by using consumer price inflation as a state contingent sale subsidy. An analysis of the welfare gains of alternative rules show that targeting mark-ups and asset prices might improve upon a strict inflation targeting.


JEL Classification
E3, E5

Key Words

  • oligopolistic competition
  • Optimal Monetary Policy
  • product market frictions