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Steady-state equilibrium with state-dependent pricing

  • John, A.Andrew
  • Wolman, Alexander L.

State-dependent pricing models are now an operational framework for quantitative business cycle analysis. The analysis in Ball and Romer [1991. Sticky prices as coordination failure. American Economic Review 81 (3), 539-552], however, suggests that such models may be rife with multiple equilibria, for in their static model, price adjustment is always characterized by complementarity, a necessary condition for multiplicity. We study existence and uniqueness of steady-state equilibrium in a discrete-time state-dependent pricing model. We find only weak complementarity and no evidence of multiplicity. However, nonexistence of symmetric steady-state equilibrium with pure strategies arises in the region of the parameter space between flexible and sticky prices.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 55 (2008)
Issue (Month): 2 (March)
Pages: 383-405

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Handle: RePEc:eee:moneco:v:55:y:2008:i:2:p:383-405
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  1. Robert G. King & Alexander L. Wolman, 2004. "Monetary discretion, pricing complementarity, and dynamic multiple equilibria," Working Paper 04-05, Federal Reserve Bank of Richmond.
  2. Mikhail Golosov & Robert E. Lucas, 2003. "Menu Costs and Phillips Curves," NBER Working Papers 10187, National Bureau of Economic Research, Inc.
  3. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  4. Aubhik Khan & Julia Thomas, 2003. "Inventories and the Business Cycle: An Equilibrium Analysis of (S,s) Policies," NBER Working Papers 10078, National Bureau of Economic Research, Inc.
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  8. Julia K. Thomas, 2002. "Is lumpy investment relevant for the business cycle?," Staff Report 302, Federal Reserve Bank of Minneapolis.
  9. Burstein, Ariel T., 2006. "Inflation and output dynamics with state-dependent pricing decisions," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1235-1257, October.
  10. Laurence Ball & David Romer, 1987. "Sticky Prices as Coordination Failure," NBER Working Papers 2327, National Bureau of Economic Research, Inc.
  11. Dotsey, Michael & King, Robert G., 2005. "Implications of state-dependent pricing for dynamic macroeconomic models," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 213-242, January.
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  15. repec:tpr:qjecon:v:114:y:1999:i:2:p:655-690 is not listed on IDEAS
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  17. A. Andrew John & Alexander L. Wolman, 2004. "An inquiry into the existence and uniqueness of equilibrium with state-dependent pricing," Working Paper 04-04, Federal Reserve Bank of Richmond.
  18. Andrew C. Caplin & Daniel F. Spulber, 1987. "Menu Costs and the Neutrality of Money," NBER Working Papers 2311, National Bureau of Economic Research, Inc.
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