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A Dynamic Economy with Costly Price Adjustment

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Abstract

This paper studies a general-equilibrium model of a dynamic economy with menu costs. Each firm's productivity is exposed to idiosyncratic and aggregate productivity shocks around a trend, and the money supply to monetary shocks around a trend. All consumption, pricing, and production decisions are based on optimizing behavior. There exists a staggered Markov perfect equilibrium with prices determined by a two-sided (s,S) markup strategy. The paper analyzes the optimal markup strategy and investigates the dynamics of the price index and the aggregate output. The welfare consequences of the uncertain aggregate productivity and money supply are also examined. Ce papier étudie un modèle d'équilibre général d'une économie dynamique avec coûts de menu. La productivité de chaque firme est sujette à des chocs individuels et agrégés autour d'une tendance, ainsi que l'offre de monnaie autour d'une tendance. Toutes les décisions de consommation, de détermination des prix et de production sont basées sur un comportement optimisateur. Il existe un équilibre échelonné parfait de Markov avec des prix déterminés par une stratégie (s,S) de marge ajoutée bidirectionnelle. Le papier analyse la stratégie de marge ajoutée optimale et étudie les dynamiques de l'indice des prix et de la production agrégée. Les conséquences pour le bien-être de l'incertitude sur la productivité agrégée et de l'offre de monnaie sont également examinées.

Suggested Citation

  • Leif Danziger, 1998. "A Dynamic Economy with Costly Price Adjustment," Cahiers de recherche CREFE / CREFE Working Papers 83, CREFE, Université du Québec à Montréal.
  • Handle: RePEc:cre:crefwp:83
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    References listed on IDEAS

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    More about this item

    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

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