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

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


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.

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