A new working paper from the Federal Reserve Bank of Boston looks at optimal monetary policy in an environment where firms have some scope to set prices, in contrast to standard models where prices are time dependent.

The author, Denny Lie, finds that this endogenous timing of price adjustment alters the trade-off and the cost of inflation variation faced by the monetary authority compared to "standard" models.

In particular, he finds that it is desirable to let inflation vary more under the