Ambiguous Money Distribution And The Price Stickiness Phenomenon: A Rationale From An Ambiguous Rational Expectations Approach
AbstractThis paper shows that ambiguity – as opposed to risk – may lead to sticky prices even with fully rational agents. Attitude towards ambiguity is assumed, as supported by theoretical literature and experimental evidence, to be asymmetric in the form of ambiguity aversion towards uncertain gains and ambiguity seeking towards losses. In this setting that price stickiness follows a change in the money supply level that does not alter the distribution of money constitutes a self fulfilling expectations equilibrium. That is the average (expected) result, but other interesting cases can occur (price overshooting and an inverse relationship between prices economic activity). Money neutrality remains true in the long run. The main result is carried out in a model where ambiguity concerns firms’ ignorance about the relationship between the stock of money and money distribution.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Economic Policy, Finance and Development (DEPFID), University of Siena in its series Department of Economic Policy, Finance and Development (DEPFID) University of Siena with number 0708.
Date of creation: Jul 2008
Date of revision:
ambiguity; multiple priors; price stickiness.;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- O42 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-07-30 (All new papers)
- NEP-MAC-2008-07-30 (Macroeconomics)
- NEP-UPT-2008-07-30 (Utility Models & Prospect Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Epstein, Larry G. & Schneider, Martin, 2003.
Journal of Economic Theory,
Elsevier, vol. 113(1), pages 1-31, November.
- Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August.
- Han Bleichrodt & Jose Luis Pinto & Peter P. Wakker, 2001. "Making Descriptive Use of Prospect Theory to Improve the Prescriptive Use of Expected Utility," Management Science, INFORMS, vol. 47(11), pages 1498-1514, November.
- Chateauneuf, A. & Wakker, P., 1998.
"An Axiomatization of Cumulative Prospect Theory for Decision Under Risk,"
Papiers d'Economie MathÃÂ©matique et Applications
98.51, UniversitÃ© PanthÃ©on-Sorbonne (Paris 1).
- Chateauneuf, Alain & Wakker, Peter, 1999. "An Axiomatization of Cumulative Prospect Theory for Decision under Risk," Journal of Risk and Uncertainty, Springer, vol. 18(2), pages 137-45, August.
- Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
- Amos Tversky & Daniel Kahneman, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Levine's Working Paper Archive
7656, David K. Levine.
- Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
- Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
- Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
- 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.
- Michael Kilka & Martin Weber, 2001. "What Determines the Shape of the Probability Weighting Function Under Uncertainty?," Management Science, INFORMS, vol. 47(12), pages 1712-1726, December.
- Farmer, Roger E. A., 1992. "Nominal price stickiness as a rational expectations equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 16(2), pages 317-337, April.
- Han Bleichrodt & Jose Luis Pinto, 2000. "A Parameter-Free Elicitation of the Probability Weighting Function in Medical Decision Analysis," Management Science, INFORMS, vol. 46(11), pages 1485-1496, November.
- 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..
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Carlo Zappia).
If references are entirely missing, you can add them using this form.