Price Smoothing Policies - A Welfare Analysis
Title: Price Smoothing Policies - A Welfare Analysis
Author: CANOVA, Fabio
Citation: Journal of Monetary Economics, 1992, 30, 2, 255-275
In post-WWII experience U.S. monetary authorities have attempted to eliminate seasonal fluctuations in prices and nominal interest rates. Developments in financial markets and recently discovered empirical regularities regarding the seasonal cycle seem to make these activities questionable. Using a money-in-the-utility-function model this paper analyzes the welfare properties of price and interest rate smoothing policies and the sense in which the distinction between seasonal and cyclical fluctuations is relevant. It is shown that smoothing policies are welfare improving, but not optimal, and that the origin of the shocks, not the persistence of the fluctuations, is relevant in formulating policies.
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