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The real effects of inflation in continuous versus discrete time sticky price models

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Listed:
  • Wai-Yip Alex Ho

    (Boston University, MA, USA)

  • James Yetman

    (The University of Hong Kong, Hong Kong)

Abstract

We demonstrate the important implications of the assumptions of discrete time in many sticky price models of the macroeconomy. For a given level of menu costs, discrete time models imply longer average contract length but smaller real effects of both trend inflation and monetary shocks than continuous time models. It is also feasible for a firm to enjoy full price flexibility in discrete time, while this would require paying infinite menu costs in continuous time, a distinction that is most important at high levels of trend inflation. Copyright © 2007 John Wiley & Sons, Ltd.

Suggested Citation

  • Wai-Yip Alex Ho & James Yetman, 2007. "The real effects of inflation in continuous versus discrete time sticky price models," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(6), pages 633-638.
    • Handle: RePEc:wly:mgtdec:v:28:y:2007:i:6:p:633-638
    DOI: 10.1002/mde.1327
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    References listed on IDEAS

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    1. Devereux, Michael B. & Yetman, James, 2002. "Menu costs and the long-run output-inflation trade-off," Economics Letters, Elsevier, vol. 76(1), pages 95-100, June.
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    Cited by:

    1. Daniel Levy, 2007. "Price rigidity and flexibility: recent theoretical developments," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(6), pages 523-530.

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