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 all parameter values. When the volatility of monetary innovations is low and interactions among firms are high, the aggregate price level exhibits rigidity, in that it does not fully react to contemporaneous aggregate demand shocks. We discuss the role of the nature of experimentation, and of path dependence driven by interactions, in explaining these results.
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Bibliographic InfoPaper provided by University of Toulouse 1 Capitole in its series Open Access publications from University of Toulouse 1 Capitole with number http://neeo.univ-tlse1.fr/1135/.
Date of creation: Jun 2005
Date of revision:
Publication status: Published in American Economic Review (2005-06) v.95, p.765-779
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Other versions of this item:
- Gilles Saint-Paul, 2005. "Some Evolutionary Foundations for Price Level Rigidity," American Economic Review, American Economic Association, vol. 95(3), pages 765-779, June.
- Saint-Paul, Gilles, 2002. "Some Evolutionary Foundations for Price Level Rigidity," CEPR Discussion Papers 3150, C.E.P.R. Discussion Papers.
- Gilles Saint-Paul, 2002. "Some Evolutionary Foundations for Price Level Rigidity," CESifo Working Paper Series 720, CESifo Group Munich.
- 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.
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- repec:spa:wpaper:2013wpecon03 is not listed on IDEAS
- Saint-Paul, Gilles, 2010. "A "quantum" approach to rational inattention," CEPR Discussion Papers 7739, C.E.P.R. Discussion Papers.
- Gilberto Tadeu Lima & Jaylson Jair da Silveira, 2013. "Monetary Neutrality under Evolutionary Dominance of Bounded Rationality," Working Papers, Department of Economics 2013_03, University of São Paulo (FEA-USP).
- Jaylson Jair da Silveira & Gilberto Tadeu Lima, 2007. "Regimes De Ajustamento Nominal Em Uma Macrodinâmica Evolucionária," Anais do XXXV Encontro Nacional de Economia [Proceedings of the 35th Brazilian Economics Meeting] 021, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
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