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Learning-by-doing and Endogenous Price-level Inertia

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  • Alok Johri

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 in\u2021ation in response to a nominal shock. This occurs because firms temper their desire to raise prices after a positive money growth shock in order to learn and lower future costs.

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File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/2005-02.pdf
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Bibliographic Info

Paper provided by McMaster University in its series Department of Economics Working Papers with number 2005-02.

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Length: 21 pages
Date of creation: May 2005
Date of revision:
Handle: RePEc:mcm:deptwp:2005-02

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Keywords: Endogenous price stickiness; Business Cycles; Inf1ation; Nominal rigidities; Learning-by-doing; Propagation mechanisms.;

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  11. Chang, Yongsung & Gomes, Joao F & Schorfheide, Frank, 2002. "Learning by Doing as a Propagation Mechanism," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3599, C.E.P.R. Discussion Papers.
  12. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper, Federal Reserve Bank of Cleveland 0107, Federal Reserve Bank of Cleveland.
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  22. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(1), pages 1-23, February.
  23. Nelson, E., 1998. "Sluggish inflation and optimizing models of the business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 42(2), pages 303-322, July.
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  26. Alok Johri and Marc-André Letendre, 2006. "What do “residuals” from first-order conditions reveal about DGE models?," Department of Economics Working Papers 2006-01, McMaster University.
  27. C. Lanier Benkard, 2000. "Learning and Forgetting: The Dynamics of Aircraft Production," American Economic Review, American Economic Association, American Economic Association, vol. 90(4), pages 1034-1054, September.
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