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Cross price effects, nominal rigidity and endogenous persistence

Author

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  • George J. Bratsiotis

    (University of Manchester, and Centre of Growth and Business Cycle Research (CGBCR))

Abstract

This paper shows that in macroeconomic models of product differentiation that are built on CES utility specifications the widely used assumption of approximating cross price effects to zero, (since Dixit-Stiglitz 1979), plays indeed no crucial role. This is true not only when a large number of agents is assumed, but also at the flexible symmetric macro equilibrium where such effects are shown to cancel out regardless of the number of agents. We then show that this latter result is no longer true in the presence of nominal rigidities, where the ratio of cross to own price elasticities, (typically absent in recent New Keynesian models), is shown to be the key determinant of the coefficient of wage and inflation persistence.

Suggested Citation

  • George J. Bratsiotis, 2008. "Cross price effects, nominal rigidity and endogenous persistence," Economics Bulletin, AccessEcon, vol. 5(29), pages 1-6.
  • Handle: RePEc:ebl:ecbull:eb-08e00015
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    References listed on IDEAS

    as
    1. Paul R. Bergin & Robert C. Feenstra, "undated". "Staggered Price Setting And Endogenous Persistence," Department of Economics 98-05, California Davis - Department of Economics.
    2. Bratsiotis, George J., 2008. "Influential price and wage setters, monetary policy and real effects," European Journal of Political Economy, Elsevier, vol. 24(2), pages 503-517, June.
    3. Feenstra, Robert C., 2003. "A homothetic utility function for monopolistic competition models, without constant price elasticity," Economics Letters, Elsevier, vol. 78(1), pages 79-86, January.
    4. Christian E. Weber, 2002. "On the Hicks–Allen Definition of Complements and Substitutes with Discrete Changes in Prices," Metroeconomica, Wiley Blackwell, vol. 53(1), pages 37-45, February.
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    More about this item

    Keywords

    Cross Price Effects CES Utility New Keynesian Models Endogenous Persistence.;

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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