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Price setting and the steady-state effects of inflation

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  • Miguel Casares

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Abstract

This paper examines how price setting plays a key role in explaining the steady-state effects of inflation in a monopolistic competition economy with transactions-facilitating money. Three pricing variants (optimal prices, indexed prices, and unchanged prices) are introduced through a generalization of the Calvo-type setting that allows price indexation. We found that in an economy with less indexed prices, the steady-state negative impact of inflation on output is higher. Regarding welfare analysis, our results support a long-run monetary policy aimed at price stability with a close-to-zero inflation target. This finding is robust to any price setting scenario. Copyright Springer-Verlag Berlin/Heidelberg 2004

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Bibliographic Info

Article provided by Springer in its journal Spanish Economic Review.

Volume (Year): 6 (2004)
Issue (Month): 4 (December)
Pages: 267-289

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Handle: RePEc:spr:specre:v:6:y:2004:i:4:p:267-289

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Related research

Keywords: Price setting; superneutrality; welfare cost of inflation;

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References

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  1. Robert G. King & Alexander L. Wolman, 1996. "Inflation Targeting in a St. Louis Model of the 21st Century," NBER Working Papers 5507, National Bureau of Economic Research, Inc.
  2. Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers 640, Board of Governors of the Federal Reserve System (U.S.).
  3. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
  4. Miguel Casares, 2001. "Long-Run Analysis in Alternative Optimizing Monetary Models," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 0107, Departamento de Economía - Universidad Pública de Navarra.
  5. Michael Dotsey & Peter Ireland, 1994. "The welfare cost of inflation in general equilibrium," Working Paper 94-04, Federal Reserve Bank of Richmond.
  6. Jag Chadha & Andrew Haldane & Norbert Janssen, 1998. "Shoe-leather costs reconsidered," Bank of England working papers 86, Bank of England.
  7. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing And The General Equilibrium Dynamics Of Money And Output," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 655-690, May.
  8. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  9. Alexander L. Wolman, 1997. "Zero inflation and the Friedman rule: a welfare comparison," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-21.
  10. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
  11. Robert King & Alexander L. Wolman, 1999. "What Should the Monetary Authority Do When Prices Are Sticky?," NBER Chapters, in: Monetary Policy Rules, pages 349-404 National Bureau of Economic Research, Inc.
  12. Pencavel, John, 1987. "Labor supply of men: A survey," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 1, pages 3-102 Elsevier.
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Cited by:
  1. Levin, Andrew & Yun, Tack, 2007. "Reconsidering the natural rate hypothesis in a New Keynesian framework," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1344-1365, July.
  2. Le, Vo Phuong Mai & Minford, Patrick, 2007. "Optimising Indexation Arrangements under Calvo Contracts and their Implications for Monetary Policy," CEPR Discussion Papers 6325, C.E.P.R. Discussion Papers.
  3. Matthews, Kent & Meenagh, David & Minford, Patrick & Webb, Bruce, 2006. "Monetary regimes: is there a trade-off between consumption and employment variability?," Cardiff Economics Working Papers E2006/12, Cardiff University, Cardiff Business School, Economics Section.
  4. Miguel Casares, 2007. "Monopolistic Competition, Sticky Prices, and the Minimal Mark-Up in Steady State," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 0702, Departamento de Economía - Universidad Pública de Navarra.
  5. Minford, Patrick & Peel, David, 2004. "Calvo Contracts: A Critique," CEPR Discussion Papers 4288, C.E.P.R. Discussion Papers.

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