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A Dynamic Economy with Costly Price Adjustments

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  • Leif Danziger

Abstract

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.

Suggested Citation

  • Leif Danziger, 1999. "A Dynamic Economy with Costly Price Adjustments," American Economic Review, American Economic Association, vol. 89(4), pages 878-901, September.
    • 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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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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