Some Evolutionary Foundations for Price Level Rigidity
AbstractThis paper shows that price rigidity evolves in an economy populated by imperfectly rational agents who experiment with alternative rules of thumb. In the model, firms must set their prices in face of aggregate demand shocks. Their payoff depends on the level of aggregate demand, as well as on their own price and their "neighbor's" price. The latter assumption captures local interactions. Despite the fact that the rational expectations equilibrium (REE) is characterized by a simple pricing rule that firms can easily adopt, the economy does not converge to the REE for all parameter values. When the volatility of monetary innovations is low and interactions among firms are high, the aggregate price level exhibits rigidity, in that it does not fully react to contemporaneous aggregate demand shocks. We discuss the role of the nature of experimentation, and of path dependence driven by interactions, in explaining these results.
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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Review.
Volume (Year): 95 (2005)
Issue (Month): 3 (June)
Other versions of this item:
- Gilles Saint-Paul, 2002. "Some Evolutionary Foundations for Price Level Rigidity," CESifo Working Paper Series 720, CESifo Group Munich.
- Saint-Paul, Gilles, 2002. "Some Evolutionary Foundations for Price Level Rigidity," CEPR Discussion Papers 3150, C.E.P.R. Discussion Papers.
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
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- Albert Marcet & Juan Pablo Nicolini, 2005.
"Money and Prices in Models of Bounded Rationality in High Inflation Economies,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 452-479, April.
- Marcet, Albert & Nicolini, Juan Pablo, 2005. "Money and prices in models of bounded rationality in high inflation economies," Working Paper Series 0469, European Central Bank.
- Albert Marcet & Juan Pablo Nicolini, 2005. "Money and Prices in Models of Bounded Rationality in High Inflation Economies," Working Papers 217, Barcelona Graduate School of Economics.
- Albert Marcet & Juan Pablo Nicolini, 2005. "Money and prices in models of bounded rationality in high inflation economies," Economics Working Papers 875, Department of Economics and Business, Universitat Pompeu Fabra.
- Albert Marcet & Juan Pablo Nicolini, 2004. "Money and Prices in Models of Bounded Rationality in High Inflation Economies," Working Papers 172, Barcelona Graduate School of Economics.
- Alexis Anagnostopoulos & Italo Bove & Karl Schlag & Omar Licandro, 2006.
"An Evolutionary Theory of Inflation Inertia,"
- repec:spa:wpaper:2013wpecon03 is not listed on IDEAS
- Saint-Paul, Gilles, 2010. "A "quantum" approach to rational inattention," CEPR Discussion Papers 7739, C.E.P.R. Discussion Papers.
- Gilberto Tadeu Lima & Jaylson Jair da Silveira, 2013. "Monetary Neutrality under Evolutionary Dominance of Bounded Rationality," Working Papers, Department of Economics 2013_03, University of São Paulo (FEA-USP).
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