Pricing in a small open monetary economy: a Post Keynesian model

Abstract

Pricing is conceived within the framework of a monetary economy with fully endogenous money. Agents react to the basic tools of monetary policy, the rate of interest, and the rate of exchange, forming prices and quantities. But the maximization of the profit rate leads to a bifurcated price behavior, which, as it is shown, can be neither neutral nor stable. The implications for monetary policy highlight that the conditions for macroeconomic stability cannot be reduced to zero inflation nor a nil public deficit. Furthermore, such policies may turn contradictory if they do not consider the non-neutrality of monetary policy.open monetary economy, pricing,