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Delivering Endogenous Inertia in Prices and Output

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  • Alok Johri

    (McMaster University)

Abstract

This paper presents a DGE model in which aggregate price level inertia is generated endogenously by the optimizing behaviour of price-setting firms. All the usual sources of inertia are absent here ie., all firms are simultaneously free to change their price once every period and face no adjustment costs in doing so. Despite this, the model generates persistent movements in aggregate output and inflation in response to a nominal shock. Two modifications of a standard one-quarter pre-set pricing model deliver these results: learning-by-doing and habit formation in leisure. While the model delivers persistence, simulations based on estimated shocks to tfp and money growth suggest both output and inflation are too volatile relative to the data and fail to closely follow the historical time series. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2009.03.001
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 12 (2009)
Issue (Month): 4 (October)
Pages: 736-754

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Handle: RePEc:red:issued:07-131

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Related research

Keywords: Endogenous price stickiness; Business cycles; Inflation; Nominal rigidities; Learning-by-doing; Habit formation; Propagation mechanisms; Persistence;

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References

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Citations

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Cited by:
  1. Alok Johri, 2007. "Delivering Endogenous Inertia in Prices and Output," Department of Economics Working Papers 2007-04, McMaster University.
  2. Alok Johri & Marc-Andre Letendre & Daqing Luo, 2010. "Organizational Capital and the International Co-movement of Investment," Department of Economics Working Papers 2010-05, McMaster University.
  3. Alok Johri & Christopher Gunn, 2009. "News and knowledge capital," 2009 Meeting Papers 763, Society for Economic Dynamics.
  4. Kegiang Hou & Alok Johri, 2013. "Intangible Capital and the Excess Volatility of Aggregate Profits," Department of Economics Working Papers 2013-04, McMaster University.
  5. Alok Johri & Bidyut Kumar Talukdar, 2011. "Organizational Capital and Optimal Ramsey Taxation," Department of Economics Working Papers 2011-09, McMaster University.
  6. Alok Johri, 2009. "Online Appendix to "Delivering endogenous inertia in prices and output"," Technical Appendices 07-131, Review of Economic Dynamics.

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