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Predetermined Prices and the Persistent Effects of Money on Output

  • Devereux, Michael B
  • Yetman, James

This Paper illustrates a model of predetermined pricing based on the work of Fischer (1977), where firms set a fixed schedule of nominal prices at the time of price readjustment. This type of price-setting specification cannot produce any excess persistence in a fixed duration model of staggered prices. But we show that with a probabilistic model of price adjustment, as in Calvo (1983), a predetermined pricing specification can produce excess persistence. Moreover, in response to a money shock, the aggregate dynamics are very similar to those under a specification of fixed prices, the assumption underlying most recent dynamic sticky-price models.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2917.

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Date of creation: Aug 2001
Date of revision:
Handle: RePEc:cpr:ceprdp:2917
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  1. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Sticky price models of the business cycle: can the contract multiplier solve the persistence problem?," Staff Report 217, Federal Reserve Bank of Minneapolis.
  2. Michael T. Kiley, 1999. "Partial adjustment and staggered price setting," Finance and Economics Discussion Series 1999-01, Board of Governors of the Federal Reserve System (U.S.).
  3. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
  4. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
  5. Ball, Laurence & Romer, David, 1990. "Real Rigidities and the Non-neutrality of Money," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 183-203, April.
  6. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
  7. Jeanne, Olivier, 1998. "Generating real persistent effects of monetary shocks: How much nominal rigidity do we really need?," European Economic Review, Elsevier, vol. 42(6), pages 1009-1032, June.
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