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Ambiguous Money Distribution And The Price Stickiness Phenomenon: A Rationale From An Ambiguous Rational Expectations Approach

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Author Info
Marcello Basili ()
Stefano Dalle Mura ()

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Abstract

This 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.

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Paper 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.

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Date of creation: Jul 2008
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Handle: RePEc:usi:depfid:0708

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Related research
Keywords: 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

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References listed on IDEAS
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  1. 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. [Downloadable!] (restricted)
  2. Larry G. Epstein & Martin Schneider, 2001. "Recursive Multiple-Priors," RCER Working Papers 485, University of Rochester - Center for Economic Research (RCER). [Downloadable!]
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  3. 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. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
  5. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
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  7. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April. [Downloadable!] (restricted)
  8. 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.
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  10. 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.. [Downloadable!] (restricted)
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