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Delivering Endogenous Inertia in Prices and Output

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  • Alok Johri

    (McMaster University)

Abstract

This paper presents a DGE model in which aggregate price level inertia is generated endogenously by the optimizing behaviour of price-setting firms. All the usual sources of inertia are absent here ie., all firms are simultaneously free to change their price once every period and face no adjustment costs in doing so. Despite this, the model generates persistent movements in aggregate output and inflation in response to a nominal shock. Two modifications of a standard one-quarter pre-set pricing model deliver these results: learning-by-doing and habit formation in leisure. While the model delivers persistence, simulations based on estimated shocks to tfp and money growth suggest both output and inflation are too volatile relative to the data and fail to closely follow the historical time series. (Copyright: Elsevier)

Suggested Citation

  • Alok Johri, 2009. "Delivering Endogenous Inertia in Prices and Output," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 736-754, October.
  • Handle: RePEc:red:issued:07-131
    DOI: 10.1016/j.red.2009.03.001
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    Cited by:

    1. Li, Xing & Hou, Keqiang, 2019. "R&D based knowledge capital and future firm growth: Evidence from China’s Growth Enterprise Market firms," Economic Modelling, Elsevier, vol. 83(C), pages 287-298.
    2. Alok Johri, 2009. "Delivering Endogenous Inertia in Prices and Output," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 736-754, October.
    3. Johri, Alok & Letendre, Marc-André & Luo, Daqing, 2011. "Organizational capital and the international co-movement of investment," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 511-523.
    4. Alok Johri & Muhebullah Karimzada, 2021. "Learning efficiency shocks, knowledge capital and the business cycle: A Bayesian evaluation," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(3), pages 1314-1360, November.
    5. Keqiang Hou & Alok Johri, 2018. "Intangible Capital, the Labor Wedge and the Volatility of Corporate Profits," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 216-234, July.
    6. Malik, Kashif Zaheer & Ali, Syed Zahid & Khalid, Ahmed M., 2014. "Intangible capital in a real business cycle model," Economic Modelling, Elsevier, vol. 39(C), pages 32-48.
    7. Christopher Gunn & Alok Johri, 2011. "News and knowledge capital," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 92-101, January.
    8. Alok Johri, 2009. "Delivering Endogenous Inertia in Prices and Output," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 736-754, October.
    9. Alok Johri & Bidyut Talukdar, 2023. "Organizational capital and optimal Ramsey taxation," Indian Economic Review, Springer, vol. 58(1), pages 193-210, July.
    10. Talukdar Bidyut, 2014. "Organizational learning and optimal fiscal and monetary policy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 14(1), pages 1-31, January.
    11. Keqiang Hou & Alok Johri, 2018. "Intangible Capital, the Labor Wedge and the Volatility of Corporate Profits," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 216-234, July.
    12. Kegiang Hou & Alok Johri, 2013. "Intangible Capital and the Excess Volatility of Aggregate Profits," Department of Economics Working Papers 2013-04, McMaster University.

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    More about this item

    Keywords

    Endogenous price stickiness; Business cycles; Inflation; Nominal rigidities; Learning-by-doing; Habit formation; Propagation mechanisms; Persistence;
    All these keywords.

    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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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