DP2757 Price Stability as a Nash Equilibrium in Monetary Open-Economy Models

Author(s): Pierpaolo Benigno, Gianluca Benigno
Publication Date: April 2001
Keyword(s): Nash Equilibrium, Open Economy, Optimal Monetary Policy, Price Stability
JEL(s): E52, F41
Programme Areas: International Macroeconomics
Link to this Page: http://www.cepr.org/pubs/dps/DP2757

A two-country dynamic general-equilibrium model with imperfect competition and price stickiness is considered. This work shows the conditions under which price stability can implement the flexible-price allocation as a Nash equilibrium. This is possible if and only if both countries maintain a certain positive degree of monopolistic competition. In such equilibrium, the monetary policymakers have no incentive to surprise price setters ex post.