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Monopolistic Competition, Sticky Prices, and the Minimal Mark-Up in Steady State

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Abstract

This note reports the rate of inflation that minimizes the mark-up of prices over marginal costs in the steady-state solution of a monopolistic competition model with either Taylor (1980) or Calvo (1983) pricing. The minimal mark-up is always found at a positive and low rate of inflation for any sensible parameter calibration. Actually, the rate of inflation that minimizes the mark-up is very close to ratio between the real rate of discount and the Dixit-Stiglitz elasticity. This result is robust to altenative sticky-price specifications.

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File URL: ftp://ftp.econ.unavarra.es/pub/DocumentosTrab/DT0702.PDF
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Bibliographic Info

Paper provided by Departamento de Economía - Universidad Pública de Navarra in its series Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra with number 0702.

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Length: pages
Date of creation: 2007
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Publication status: Published in
Handle: RePEc:nav:ecupna:0702

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Keywords: monopolistic competition; sticky prices; minimal mark-up;

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  1. 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.
  2. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  3. Sbordone, Argia, 1998. "Prices and Unit Labor Costs: A New Test of Price Stickiness," Seminar Papers 653, Stockholm University, Institute for International Economic Studies.
  4. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2001. "Optimal monetary policy," Working Papers 01-5, Federal Reserve Bank of Philadelphia.
  5. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1996. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," NBER Working Papers 5809, National Bureau of Economic Research, Inc.
  6. K. Huang & Z. Liu, . "Staggered price-setting, staggered wage-setting, and business cycle persistence," Working Papers 2000-28, Utah State University, Department of Economics.
  7. Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999. "Optimal Monetary Policy with Staggered Wage and Price Contracts," Computing in Economics and Finance 1999 1151, Society for Computational Economics.
  8. Miguel Casares, 2004. "Price setting and the steady-state effects of inflation," Spanish Economic Review, Springer, vol. 6(4), pages 267-289, December.
  9. Michael T. Kiley, 1999. "Partial adjustment and staggered price setting," Finance and Economics Discussion Series 1999-01, Board of Governors of the Federal Reserve System (U.S.).
  10. repec:nbr:nberre:0126 is not listed on IDEAS
  11. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
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