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Two New Keynesian Theories Of Sticky Prices

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  • Farmer, Roger E.A.

Abstract

Two alternative theories of aggregate supply,both with a New Keynesian flavor, are compared. Thefirst assumes that prices are rigid due to theexistence of menu costs. The second derives price stickinessendogenously as one equilibrium in an economy with multiple equilibria. Inboth cases I show that the Ball Romer concept of realrigidities is essential to explain why monetary policy has real persistenteffects. I argue that dynamic menu cost models are determinate because theymake special assumptions about the way that money enters the economy. Forexample, most authors assume either a cash-in-advance constraint or thatmoney enters separably into utility or production functions. Once one movesbeyond these special cases, menu cost models that display real rigidity arealso likely to display indeterminacy.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 4 (2000)
Issue (Month): 01 (March)
Pages: 74-107

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Handle: RePEc:cup:macdyn:v:4:y:2000:i:01:p:74-107_01

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Cited by:
  1. Jess Benhabib & Roger E.A. Farmer, 2000. "The Monetary Transmission Mechanism," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(3), pages 523-550, July.
  2. Giovanni Lombardo, . "Sticky Prices, Markup and the Business Cycle: Some Evidence," Discussion Papers 01/06, Department of Economics, University of York.
  3. Fabio Canova & Gianni De Nicolo, 2000. "Monetary disturbances matter for business fluctuations in the G-7," International Finance Discussion Papers 660, Board of Governors of the Federal Reserve System (U.S.).
  4. Katharine S. Neiss & Evi Pappa, 2005. "Persistence without too much price stickiness: the role of variable factor utilization," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 231-255, January.
  5. Haruvy, Ernan & Prasad, Ashutosh, 2005. "Freeware as a competitive deterrent," Information Economics and Policy, Elsevier, vol. 17(4), pages 513-534, October.
  6. Giammarioli, Nicola, 2003. "Indeterminacy and search theory," Working Paper Series 0271, European Central Bank.
  7. Kirill Sosunov, 2001. "Monetary neutrality in one specific class of DGE model with staggered prices," Macroeconomics 0112003, EconWPA.

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