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A Dynamic Economy with Costly Price Adjustments

  • Leif Danziger

This paper studies a general-equilibrium model of a dynamic economy with menu costs. Each firm's productivity is exposed to idiosyncratic and aggregate productivity shocks around a trend, and the money supply to monetary shocks around a trend. All consumption, pricing, and production decisions are based on optimizing behavior. There exists a staggered Markov perfect equilibrium with prices determined by a two-sided (s, S) markup strategy. The paper analyzes the optimal markup strategy and investigates the dynamics of the price index and the aggregate output. The welfare consequences of the uncertain aggregate productivity and money supply are also examined.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 89 (1999)
Issue (Month): 4 (September)
Pages: 878-901

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Handle: RePEc:aea:aecrev:v:89:y:1999:i:4:p:878-901
Note: DOI: 10.1257/aer.89.4.878
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  1. Cooley, T.F. & Ohanian, L.E., 1989. "The Cyclical Behavior Of Prices," RCER Working Papers 188, University of Rochester - Center for Economic Research (RCER).
  2. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  3. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1991. "Dynamic (S,s) Economies," NBER Working Papers 3734, National Bureau of Economic Research, Inc.
  4. repec:oup:qjecon:v:102:y:1987:i:4:p:703-25 is not listed on IDEAS
  5. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  6. repec:oup:qjecon:v:100:y:1985:i:2:p:529-38 is not listed on IDEAS
  7. repec:oup:restud:v:60:y:1993:i:1:p:53-68 is not listed on IDEAS
  8. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 349-89, April.
  9. Andrew C. Caplin & Daniel F. Spulber, 1987. "Menu Costs and the Neutrality of Money," NBER Working Papers 2311, National Bureau of Economic Research, Inc.
  10. Danziger, Leif, 1984. "Stochastic Inflation and the Optimal Policy of Price Adjustment," Economic Inquiry, Western Economic Association International, vol. 22(1), pages 98-108, January.
  11. Levy, Daniel, et al, 1997. "The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 791-825, August.
  12. 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.
  13. Giuseppe Bertola & Ricardo J. Caballero, 1990. "Kinked Adjustment Costs and Aggregate Dynamics," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 237-296 National Bureau of Economic Research, Inc.
  14. repec:oup:qjecon:v:106:y:1991:i:3:p:683-708 is not listed on IDEAS
  15. repec:oup:qjecon:v:100:y:1985:i:5:p:823-38 is not listed on IDEAS
  16. Ball, Laurence & Romer, David, 1989. "Are Prices Too Sticky?," The Quarterly Journal of Economics, MIT Press, vol. 104(3), pages 507-24, August.
  17. repec:oup:restud:v:58:y:1991:i:1:p:141-51 is not listed on IDEAS
  18. Julio J. Rotemberg, 1994. "Prices, Output and Hours: An Empirical Analysis Based on a Sticky Price Model," NBER Working Papers 4948, National Bureau of Economic Research, Inc.
  19. repec:oup:restud:v:55:y:1988:i:3:p:353-76 is not listed on IDEAS
  20. Parkin, Michael, 1986. "The Output-Inflation Trade-off When Prices Are Costly to Change," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 200-224, February.
  21. repec:oup:restud:v:44:y:1977:i:2:p:287-303 is not listed on IDEAS
  22. repec:oup:qjecon:v:104:y:1989:i:3:p:507-24 is not listed on IDEAS
  23. Danziger, Leif, 1983. "Price Adjustments with Stochastic Inflation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 699-707, October.
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