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Endogenous Time-Dependent Rules and Inflation Inertia

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  • Marco Bonomo

    (Graduate School of Economics, Getulio Vargas Foundation)

  • Carlos Carvalho

    (Princeton University)

Abstract

In this paper we endogenize fixed price time-dependent rules to examine the output effects of monetary disinflation. We derive the optimal rules in and out of inflationary steady states, and develop a methodology to aggregate individual pricing rules which vary through time. Because of strategic complementarities we have to solve both problems simultaneously. This allows us to reassess the output costs of monetary disinflations, including aspects such as the roles of the initial level of inflation, and of the degree of strategic complementarity in price. Finally, we relax the strict assumption of pure time-dependent rules by allowing price setters to reevaluate their rules at the time disinflation is announced.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0402005.

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Date of creation: 03 Feb 2004
Date of revision: 19 May 2005
Handle: RePEc:wpa:wuwpma:0402005

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  1. Marco Bonomo & Carlos Viana de Carvalho, 2005. "Endogenous Time-Dependent Rules and the Costs of Disinflation with Imperfect Credibility," Macroeconomics 0509004, EconWPA.
  2. Caplin, A. & Leahy, J., 1992. "Aggregation and Optimization with State-Dependent Pricing," Discussion Papers 1992_15, Columbia University, Department of Economics.
  3. Mark J. Zbaracki & Mark Ritson & Daniel Levy & Shantanu Dutta & Mark Bergen, 2004. "Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets," The Review of Economics and Statistics, MIT Press, vol. 86(2), pages 514-533, May.
  4. 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.
  5. Alan S. Blinder, 1991. "Why are Prices Sticky? Preliminary Results from an Interview Study," NBER Working Papers 3646, National Bureau of Economic Research, Inc.
  6. Bonomo, Marco Antônio Cesar & Garcia, René, 2000. "The Macroeconomic Effects of Infrequent Information With Adjustment Costs," Economics Working Papers (Ensaios Economicos da EPGE) 384, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  7. Sheshinski, Eytan & Weiss, Yoram, 1983. "Optimum Pricing Policy under Stochastic Inflation," Review of Economic Studies, Wiley Blackwell, vol. 50(3), pages 513-29, July.
  8. Danziger, Leif, 1988. "Costs of Price Adjustment and the Welfare Economics of Inflation and Disinflation," American Economic Review, American Economic Association, vol. 78(4), pages 633-46, September.
  9. Ireland, Peter N, 1997. "Stopping Inflations, Big and Small," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 759-75, November.
  10. Laurence Ball, 1992. "Disinflation With Imperfect Credibility," NBER Working Papers 3983, National Bureau of Economic Research, Inc.
  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.
  12. Ball, Laurence & Romer, David, 1989. "The Equilibrium and Optimal Timing of Price Changes," Review of Economic Studies, Wiley Blackwell, vol. 56(2), pages 179-98, April.
  13. Carlton, Dennis W, 1986. "The Rigidity of Prices," American Economic Review, American Economic Association, vol. 76(4), pages 637-58, September.
  14. Sheshinski, Eytan & Weiss, Yoram, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Wiley Blackwell, vol. 44(2), pages 287-303, June.
  15. repec:fth:coluec:428 is not listed on IDEAS
  16. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing And The General Equilibrium Dynamics Of Money And Output," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 655-690, May.
  17. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
  18. Almeida, Heitor & Bonomo, Marco, 2002. "Optimal state-dependent rules, credibility, and inflation inertia," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1317-1336, October.
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