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A Dynamic Economy with Costly Price Adjustment

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This paper studies a general-equilibrium model of a dynamic economy with menu costs. Each firm's productivity is exposed to idiosyncratic and aggregate productivity shocks around a trend, and the money supply to monetary shocks around a trend. All consumption, pricing, and production decisions are based on optimizing behavior. There exists a staggered Markov perfect equilibrium with prices determined by a two-sided (s,S) markup strategy. The paper analyzes the optimal markup strategy and investigates the dynamics of the price index and the aggregate output. The welfare consequences of the uncertain aggregate productivity and money supply are also examined. Ce papier étudie un modèle d'équilibre général d'une économie dynamique avec coûts de menu. La productivité de chaque firme est sujette à des chocs individuels et agrégés autour d'une tendance, ainsi que l'offre de monnaie autour d'une tendance. Toutes les décisions de consommation, de détermination des prix et de production sont basées sur un comportement optimisateur. Il existe un équilibre échelonné parfait de Markov avec des prix déterminés par une stratégie (s,S) de marge ajoutée bidirectionnelle. Le papier analyse la stratégie de marge ajoutée optimale et étudie les dynamiques de l'indice des prix et de la production agrégée. Les conséquences pour le bien-être de l'incertitude sur la productivité agrégée et de l'offre de monnaie sont également examinées.

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File URL: http://www.unites.uqam.ca/eco/CREFE/cahiers/cah83.ps
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File URL: http://www.unites.uqam.ca/eco/CREFE/cahiers/cah83.pdf
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Bibliographic Info

Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 83.

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Length: 39 pages (+ 2 pages of figures)
Date of creation: Dec 1998
Date of revision:
Handle: RePEc:cre:crefwp:83

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  1. Giuseppe Bertola & Ricardo J. Caballero, 1990. "Kinked Adjustment Costs and Aggregate Dynamics," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 237-296 National Bureau of Economic Research, Inc.
  2. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1991. "Dynamic (S,s) Economies," NBER Working Papers 3734, National Bureau of Economic Research, Inc.
  3. Akerlof, George A & Yellen, Janet L, 1985. "A Near-rational Model of the Business Cycle, with Wage and Price Intertia," The Quarterly Journal of Economics, MIT Press, vol. 100(5), pages 823-38, Supp..
  4. Laurence M. Ball & David Romer, 1989. "Are Prices Too Sticky?," NBER Working Papers 2171, National Bureau of Economic Research, Inc.
  5. Caplin, Andrew & Leahy, John, 1991. "State-Dependent Pricing and the Dynamics of Money and Output," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 683-708, August.
  6. 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.
  7. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  8. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 349-89, April.
  9. Daniel Levy & Mark Bergen & Shantanu Dutta & Robert Venable, 2005. "The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains," Macroeconomics 0505012, EconWPA.
  10. Mankiw, N Gregory, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 529-38, May.
  11. Cooley, Thomas F. & Ohanian, Lee E., 1991. "The cyclical behavior of prices," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 25-60, August.
  12. Sheshinski, Eytan & Weiss, Yoram, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Wiley Blackwell, vol. 44(2), pages 287-303, June.
  13. Diamond, Peter A, 1993. "Search, Sticky Prices, and Inflation," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 53-68, January.
  14. Julio J. Rotemberg, 1994. "Prices, Output and Hours: An Empirical Analysis Based on a Sticky Price Model," NBER Working Papers 4948, National Bureau of Economic Research, Inc.
  15. Parkin, Michael, 1986. "The Output-Inflation Trade-off When Prices Are Costly to Change," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 200-224, February.
  16. Danziger, Leif, 1984. "Stochastic Inflation and the Optimal Policy of Price Adjustment," Economic Inquiry, Western Economic Association International, vol. 22(1), pages 98-108, January.
  17. Dixit, Avinash, 1991. "Analytical Approximations in Models of Hysteresis," Review of Economic Studies, Wiley Blackwell, vol. 58(1), pages 141-51, January.
  18. repec:fth:coluec:465 is not listed on IDEAS
  19. 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.
  20. Danziger, Leif, 1983. "Price Adjustments with Stochastic Inflation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 699-707, October.
  21. Benabou, Roland, 1988. "Search, Price Setting and Inflation," Review of Economic Studies, Wiley Blackwell, vol. 55(3), pages 353-76, July.
  22. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
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