In this paper we review and extend some of the key lessons that seem to be emerging from the Ramsey-inspired theory of dynamic optimal monetary and fiscal policies. We construct measures of the key distortions in our economy; we label these 'dynamic wedges'. Inflation, actual or anticipated,...

Many sticky-price models suggest that relative price distortion is one of the major costs of inflation. We show that this resource misallocation is costly even at quite low rates of inflation. This is because inflation strongly affects price dispersion which in turn has an impact on the economy...

We study the impact of two-sided nominal shocks in a dynamic, equilibrium macroeconomic model. Goods complementarity differs across sectors as do the costs of changing prices. Even when strategic complementarities are equal across the sectors, the systematic differences in costs of price...

This paper examines the consequences of (S,s) pricing rules in a dynamic economy with heterogeneous costs of price adjustment. We construct the stationary distributions for aggregate output and prices for our model economy. As a result of our assumption of heterogeneous costs we find that: (i)...

A key argument in Caplin and Leahy (1997) states that the correlation between monetary shocks and output is falling in the variance of the money supply. We demonstrate that this conclusion depends on solving for the correlation in the non-stationary state of the model. In the stationary state,...