Journal Article

Ramsey Monetary Policy with Capital Accumulation and Nominal Rigidities


  • Faia
  • E.
Publication Date

Recent literature on the design of optimal monetary policy has shown that deviations

from price stability are small whenever prices are sticky. This paper reconsiders

this issue by introducing capital accumulation in the model. Optimal monetary policy

in this set-up implies small deviations from price stability. The monetary authority

optimally uses inflation as an explicit tax on monopolistic profits to reduce the price

mark-up across states. Variable mark-up is achieved in this set-up since the share of

investment demand over output varies across states and in response to TFP shocks.


JEL Classification
E0, E4, E5

Key Words

  • capital accumulation
  • nominal rigidities
  • Optimal Monetary Policy