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Optimal Price Dynamics and Speculation with a Storable Good

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Author Info
Benabou, Roland

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Abstract

When the seller of a storable good must keep pace with inflation, buyers will speculate on the timing of price increases to buy and store just before. The unique Markov perfect equilibrium of this game involves recurrent periods during which the firm injects uncertainty into its price, while speculators store in increasing numbers, with possibly a final "run." The stochastic policies of many firms consistently aggregate back to a price index growing at the general rate of inflation. The model establishes that (1) inflation causes price uncertainty; and (2) speculation can be destabilizing and welfare-reducing even under perfect information. Copyright 1989 by The Econometric Society.

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Publisher Info
Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 57 (1989)
Issue (Month): 1 (January)
Pages: 41-80
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Handle: RePEc:ecm:emetrp:v:57:y:1989:i:1:p:41-80

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  1. Julio J. Rotemberg, 2004. "Fair Pricing," NBER Working Papers 10915, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Julio J. Rotemberg, 2009. "Altruistic Dynamic Pricing with Customer Regret," NBER Working Papers 14933, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1991. "Heterogeneity and Output Fluctuations in a Dynamic Menu-Cost Economy," NBER Working Papers 3729, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. David Romer, 1989. "Staggered Price Setting with Endogenous Frequency of Adjustment," NBER Working Papers 3134, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Pastine, Ivan, 2001. "Speculation and the Decision to Abandon a Fixed Exchange Rate Regime," CEPR Discussion Papers 2893, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Andrew C. Caplin & Daniel F. Spulber, 1987. "Menu Costs and the Neutrality of Money," NBER Working Papers 2311, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Mariano Tommasi, 1992. "The Welfare Effects of Inflation, The Consequences of Price Instability on Search Markets," UCLA Economics Working Papers 655, UCLA Department of Economics. [Downloadable!]
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