Optimal monetary policy responses to relative-price changes
Bank of England
Two-sector New Keynesian model with a flexible-price sector and a sticky-price sector (Calvo pricing), used to analyze optimal monetary policy responses to relative-price changes and sector-specific supply shocks
flexible-price sector: price takers with flexible prices; sticky-price sector: Calvo staggered pricing with constant markup
Section 4.2, p.70
Optimal monetary policy is complete stabilization of sticky-price inflation at zero
Main theoretical result: optimal policy stabilizes sticky-price (core) inflation at zero, stated in Section 4.1-4.2