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Optimal price dynamics and speculation with a storable good

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  • Benabou, Roland

Abstract

When the seller of a storable good must keep pace with inflation, buyers will speculate on the timing of price increases to buy and store just before. The unique Markov perfect equilibrium of this game involves recurrent periods during which the firm injects uncertainty into its price, while speculators store in increasing numbers, with possibly a final "run." The stochastic policies of many firms consistently aggregate back to a price index growing at the general rate of inflation. The model establishes that (1) inflation causes price uncertainty; and (2) speculation can be destabilizing and welfare-reducing even under perfect information. Copyright 1989 by The Econometric Society.
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  • Benabou, Roland, 1987. "Optimal price dynamics and speculation with a storable good," CEPREMAP Working Papers (Couverture Orange) 8708, CEPREMAP.
  • Handle: RePEc:cpm:cepmap:8708
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    File URL: http://www.cepremap.fr/depot/couv_orange/co8708.pdf
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    Cited by:

    1. Andreas Schabert & Sweder J G van Wijnbergen, 2014. "Sovereign Default and the Stability of Inflation-Targeting Regimes," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 62(2), pages 261-287, June.
    2. Julio J. Rotemberg, 2010. "Altruistic Dynamic Pricing with Customer Regret," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(4), pages 646-672, December.
    3. Andrew S. Caplin & Daniel F. Spulber, 1987. "Menu Costs and the Neutrality of Money," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 703-725.
    4. Ricardo J. Caballero & Eduardo M. R. A. Engel, 1993. "Heterogeneity and Output Fluctuations in a Dynamic Menu-Cost Economy," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 95-119.
    5. Ball, Laurence, 1995. "Time-consistent policy and persistent changes in inflation," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 329-350, November.
    6. Ricardo J. Caballero & Eduardo M. R. A. Engel, 1993. "Microeconomic Adjustment Hazards and Aggregate Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 108(2), pages 359-383.
    7. Romer, David, 1990. "Staggered price setting with endogenous frequency of adjustment," Economics Letters, Elsevier, vol. 32(3), pages 205-210, March.
    8. Caballero, Ricardo J & Engel, Eduardo M R A, 1991. "Dynamic (S, s) Economies," Econometrica, Econometric Society, vol. 59(6), pages 1659-1686, November.
    9. Pastine, Ivan, 2002. "Speculation and the decision to abandon a fixed exchange rate regime," Journal of International Economics, Elsevier, vol. 57(1), pages 197-229, June.
    10. Julio J. Rotemberg, 2011. "Fair Pricing," Journal of the European Economic Association, European Economic Association, vol. 9(5), pages 952-981, October.
    11. Halkos, George, 2009. "A Differential game approach in the case of a polluting oligopoly," MPRA Paper 23742, University Library of Munich, Germany.
    12. Mariano Tommasi, 1992. "The Welfare Effects of Inflation, The Consequences of Price Instability on Search Markets," UCLA Economics Working Papers 655, UCLA Department of Economics.
    13. Andrew Caplin & John Leahy, 2010. "Economic Theory and the World of Practice: A Celebration of the ( S , s ) Model," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 183-202, Winter.

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