The New Neoclassical Synthesis and the Role of Monetary Policy
Federal Reserve Bank of Richmond and University of Virginia; University of Virginia, NBER, and Federal Reserve Bank of Richmond
New Neoclassical Synthesis model combining RBC core with monopolistic competition, Calvo-style staggered price setting, and money demand; analyzes optimal monetary policy for markup stabilization and price stability
intermediate firms face constant elasticity demand, set prices subject to Calvo-style staggered adjustment, markup over marginal cost; final goods aggregator uses CES technology
Figure 3 Panel C p.264
Near-zero inflation minimizes average markup distortion and relative price distortions in NNS model with Calvo pricing
Authors explicitly recommend near-zero inflation targeting as optimal policy throughout paper; Figure 3 shows markup minimized near zero