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Steady-state equilibrium with state-dependent pricing

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  • John, A.Andrew
  • Wolman, Alexander L.

Abstract

State-dependent pricing models are now an operational framework for quantitative business cycle analysis. The analysis in Ball and Romer [1991. Sticky prices as coordination failure. American Economic Review 81 (3), 539-552], however, suggests that such models may be rife with multiple equilibria, for in their static model, price adjustment is always characterized by complementarity, a necessary condition for multiplicity. We study existence and uniqueness of steady-state equilibrium in a discrete-time state-dependent pricing model. We find only weak complementarity and no evidence of multiplicity. However, nonexistence of symmetric steady-state equilibrium with pure strategies arises in the region of the parameter space between flexible and sticky prices.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 55 (2008)
Issue (Month): 2 (March)
Pages: 383-405

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Handle: RePEc:eee:moneco:v:55:y:2008:i:2:p:383-405

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Web page: http://www.elsevier.com/locate/inca/505566

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References

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  1. Julia K. Thomas, . "Is Lumpy Investment Relevant for the Business Cycle?," GSIA Working Papers 1998-E250, Carnegie Mellon University, Tepper School of Business.
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  9. Laurence Ball & David Romer, 1987. "Sticky Prices as Coordination Failure," NBER Working Papers 2327, National Bureau of Economic Research, Inc.
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  12. Caplin, Andrew S & Spulber, Daniel F, 1987. "Menu Costs and the Neutrality of Money," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 703-25, November.
  13. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
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  15. Leif Danziger, 1999. "A Dynamic Economy with Costly Price Adjustments," American Economic Review, American Economic Association, vol. 89(4), pages 878-901, September.
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  18. A. Andrew John & Alexander L. Wolman, 2004. "An inquiry into the existence and uniqueness of equilibrium with state-dependent pricing," Working Paper 04-04, Federal Reserve Bank of Richmond.
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Cited by:
  1. Dixon, Huw, 2009. "A unified framework for understanding and comparing dynamic wage and price setting models," Cardiff Economics Working Papers E2009/20, Cardiff University, Cardiff Business School, Economics Section.
  2. Timo Henckel & Gordon D. Menzies & Daniel J. Zizzo, 2010. "Threshold Pricing in a Noisy World," CAMA Working Papers 2010-01, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  3. Michael Dotsey & Robert G. King & Alexander L. Wolman, 2013. "Inflation and real activity with firm-level productivity shocks," Working Papers 13-35, Federal Reserve Bank of Philadelphia.

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