Some Evolutionary Foundations for Price Level Rigidity
AbstractThis paper shows that price rigidity evolves in an economy populated by imperfectly rational agents who experiment with alternative rules of thumb. In the model, firms must set their prices in face of aggregate demand shocks. Their payoff depends on the level of aggregate demand, as well as on their own price and their “neighbor”‘s price. The latter assumption captures local interactions. Despite the fact that the rational expectations equilibrium (REE) is characterized by a simple pricing rule that firms can easily adopt, the economy does not converge to the REE for highly autocorrelated aggregate demand shocks and a high level of local interaction. Instead, the aggregate price level exhibits rigidity, in that it does not fully react to contemporaneous aggregate demand shocks, and inertia, in that controlling to it positively depends on its past value. We show that local interactions and serial correlation of aggregate demand shocks play a key role in generating those results.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 720.
Date of creation: 2002
Date of revision:
evolution; bounded rationality adaptive learning; experimentation; externalities; spillovers; local interaction; money; aggregate demand; price rigidity; rational expectations; monetary policy; macroeconomic fluctuations;
Other versions of this item:
- Gilles Saint-Paul, 2005. "Some Evolutionary Foundations for Price Level Rigidity," American Economic Review, American Economic Association, American Economic Association, vol. 95(3), pages 765-779, June.
- Saint-Paul, Gilles, 2002. "Some Evolutionary Foundations for Price Level Rigidity," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3150, C.E.P.R. Discussion Papers.
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
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- Albert Marcet & Juan Pablo Nicolini, 2005.
"Money and Prices in Models of Bounded Rationality in High Inflation Economies,"
217, Barcelona Graduate School of Economics.
- Albert Marcet & Juan Pablo Nicolini, 2005. "Money and Prices in Models of Bounded Rationality in High Inflation Economies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 452-479, April.
- Albert Marcet & Juan Pablo Nicolini, 2005. "Money and prices in models of bounded rationality in high inflation economies," Economics Working Papers 875, Department of Economics and Business, Universitat Pompeu Fabra.
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- Gilberto Tadeu Lima & Jaylson Jair da Silveira, 2013. "Monetary Neutrality under Evolutionary Dominance of Bounded Rationality," Working Papers, Department of Economics, University of SÃ£o Paulo (FEA-USP) 2013_03, University of SÃ£o Paulo (FEA-USP).
- Saint-Paul, Gilles, 2010. "A "quantum" approach to rational inattention," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7739, C.E.P.R. Discussion Papers.
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